I 


MB,*!  ;•!  IvH 


LIFE  INSURANCE 


LIFE  INSURANCE 

A  TEXTBOOK 


BY 

SOLOMON  S.   HUEBNER,  Pn.D. 

^ROFESSOR  OF  INSURANCE  AND  COMMERCE,   WHARTON  SCHOOL  OF  FINANCE 
AND  COMMERCE.    UNIVERSITY  OF  PENNSYLVANIA 


ENDORSED  BY  THE  EDUCATION  AND  CONSERVATION  BUREAU 
THE  NATIONAL  ASSOCIATION  OF  LIFE  UNDERWRITERS 


NEW  YORK  AND  LONDON 

D.  APPLETON  AND  COMPANY 

1919 


COPYRIGHT,  1915,  BY 
D.  APPLETON  AND  COMPANY 


Printed  in  the  United  States  of  America 


WtBfACE 

The  preparation  of  this  text  was  undertaken  at  the  sug- 
gestion of  the  National  Association  of  Life  Underwriters. 
In  making  the  suggestion,  the  Association  was  actuated  by 
the  desire  for  a  comprehensive  textbook  adapted  to  the  needs 
of  classroom  instruction  for  beginners  of  the  study  of  life 
insurance  in  colleges  and  high  schools;  one  which  would  also 
serve  as  a  clear  and  simple  exposition  of  the  subject  for 
laymen  and  life  insurance  solicitors.  To  fulfil  this  purpose 
it  has  been  the  author's  object  to  bring  together  in  com- 
pact and  classified  form  the  essential  facts,  principles  and 
practices  of  the  life-insurance  business,  and  to  present  them 
in  a  simple  and  untechnical  manner.  The  book  does  not  at- 
tempt to  discuss  the  highly  technical  aspects  of  the  business, 
such  as  the  specialist  may  desire;  instead  its  purpose  is  to 
treat  comprehensively  those  phases  concerning  which  the 
average  student,  layman  and  solicitor  should  be  informed 
in  order  to  have  a  clear  understanding  of  the  nature  of  life 
insurance  and  the  family,  personal  and  business  uses  to 
which  it  may  be  put. 

The  thirty-two  chapters  of  the  text  have  been  grouped  into 
five  distinct  parts,  dealing  respectively  with  the  "  Nature  and 
Uses  of  Life  Insurance,"  the  "  Science  of  Life  Insurance," 
"  Special  Forms  of  Life  Insurance,"  the  "  Organization, 
Management  and  Supervision  of  Legal  Eeserve  Companies/' 
and  "  Important  Legal  Phases  of  Life  Insurance."  The  first 
part  of  the  volume  is  devoted  to  a  discussion  of  the  practical 
uses  to  which  life  insurance  may  be  applied.  Separate  chap- 
ters are  devoted  to  each  of  the  leading  types  of  policies  sold, 
with  a  view  to  giving  a  detailed  analysis  of  the  contracts  and 
an  extended  statement  of  the  advantages  and  disadvantages 
connected  with  their  use  under  various  circumstances.  Spe- 


PKEFACE 

cial  effort  has  been  made  to  write  and  illustrate  this  part  of 
the  volume  in  a  manner  so  simple  as  not  only  to  adapt  it  for 
collegiate  purposes,  but  to  make  it  suitable  also  for  classroom 
instruction  in  commercial  and  high  schools.  Life  insurance, 
so  vitally  affecting  nearly  every  man  and  woman  in  the  com- 
munity and  so  intimately  related  to  the  welfare  of  the  masses, 
should  find  some  place  in  the  curriculum  of  our  high  schools. 
The  courses  offered  must  necessarily  be  simple  and  untechni- 
cal,  and  may  be  restricted  advantageously  to  an  explanation, 
chiefly  by  way  of  detailed  illustration,  of  the  reasons  why 
it  is  a  duty  to  insure  under  certain  circumstances,  the  prac- 
tical uses  to  which  life  insurance  can  be  put,  the  distinctive 
features  of  the  main  types  of  policies,  and  the  advantages  or 
disadvantages  of  each  under  certain  circumstances.  For  these 
reasons  it  is  believed  that  the  first  ten  chapters  of  the  book 
will  lend  themselves  readily  and  advantageously  to  use  in 
high  schools,  commercial  schools  and  similar  institutions. 

Part  Two  of  the  volume  deals  with  the  scientific  phases  of 
life  insurance  and  its  chapters  present  the  essential  considera- 
tions connected  with  the  measurement  of  risk,  the  principles 
underlying  rate-making,  the  net  single  premium,  the  net 
level  premium,  the  reserve,  loading,  surrender  values,  policy 
loans,  and  surplus.  For  beginners  in  the  subject  this  phase 
of  life  insurance  is  necessarily  the  most  difficult  to  under- 
stand and  appreciate.  Every  effort  has,  therefore,  been  made 
to  emphasize  the  importance  of  these  aspects  of  the  business 
and  to  explain  them  in  a  simple  manner.  Having  in  mind 
again  the  layman,  the  student,  and  the  average  solicitor,  this 
part  of  the  volume  is  as  untechnical  in  character  as  possible 
and  only  simple  mathematics  has  been  used  to  make  clear 
the  scientific  foundation  that  underlies  correct  principles. 
Furthermore,  the  examples  used  to  illustrate  these  principles 
are  fully  stated,  and  special  emphasis  has  been  given  to  the 
proper  classification  of  the  respective  topics  so  as  to  assist 
the  student  in  grasping  the  subject. 

I  wish  to  acknowledge  my  indebtedness  to  the  many  of- 
ficials of  insurance  companies  who  have  shown  me  the  utmost 


PREFACE 

courtesy  in  meeting  my  requests  for  explanation  of  the  office 
and  field  practices  followed  by  their  companies  and  for  forms, 
data,  printed  circulars  and  other  information.  Special  ac- 
knowledgment is  due  to  my  colleague,  Dr.  Bruce  D.  Mudgett, 
Instructor  in  Insurance  at  the  University  of  Pennsylvania. 
Not  only  did  Dr.  Mudgett  write  the  first  seven  chapters  of 
Part  Two  of  the  volume,  dealing  with  the  science  of  life  in- 
surance, as  well  as  the  chapter  on  disability  insurance,  but, 
throughout  the  preparation  of  this  volume,  he  has  generously 
given  me  the  benefit  of  his  advice  and  criticism.  He  also 
read  all  of  the  proofs. 

S.  S.  HUEBNER. 
University  of  Pennsylvania 


CONTENTS 

PART  I 
THE  NATURE  AND  USES  OF  LIFE  INSURANCE 

CHAPTER  PAGE 

I. — NATURE   OF   LIFE  INSURANCE   AND  THE   BASIC 

PRINCIPLES  UNDERLYING  IT 3 

Definition  and  extent  of  life  insurance,  3.  Com- 
bination of  many  risks  into  a  group  is  necessary 
to  make  the  law  of  average  apply,  5.  Necessity 
of  accumulating  a  fund  for  the  payment  of 
claims,  7.  Necessity  of  accumulating  this  fund 
according  to  scientific  principles  and  a  workable 
method,  7.  Life  insurance  changes  uncertainty 
into  certainty  and  is  the  opposite  of  gambling,  10. 

II. — FAMILY  AND  PERSONAL  USES  OF  LIFE  INSURANCE    13 

Capitalization  of  the  value  of  a  human  life  and 
indemnification  of  that  value,  14.  The  duty  to 
insure,  15.  Eliminates  worry  and  increases  initi- 
ative, 17.  Life  insurance  makes  saving  possible, 

18.  Furnishes  a  profitable  and  safe  investment, 

19.  Forces   and   encourages  thrift,   20.     Facili- 
tates the  purchase  of  a  home,  22.     Furnishes  an 
assured   income   in   the   form   of   annuities,   23. 
The  relation  of  foregoing  advantages  to  society 
at  large,  25. 

III. — BUSINESS  USES  OF  LIFE  INSURANCE  ....     29 

Close  relationship  between  the  home  and  busi- 
ness, 29.  Life  insurance  as  a  means  of  indemni- 
fication against  loss  through  the  death  of  officials 
and  valuable  employees,  31.  The  use  of  part- 
nership insurance,  34.  The  insurance  of  em- 


x  CONTENTS 

CHAPTER  PACK 

ployees  for  the  benefit  of  their  families,  36.  Life 
insurance  as  security  for  bond  issues,  38.  The 
use  of  life  insurance  as  a  means  of  enhancing 
the  credit  of  business  enterprises  during  times  of 
financial  stringency,  40.  The  use  of  life  in- 
surance as  a  means  of  borrowing  without  col- 
lateral, 42.  The  use  of  life  insurance  as  a  means 
of  making  contingent  interests  marketable,  45. 

IV. — CLASSIFICATION  OF  POLICIES 47 

Policies  classified  according  to  the  term,  47. 
Policies  classified  according  to  the  method  of  pay- 
ing premiums,  47.  Policies  classified  according 
to  the  inclusion  or  exclusion  of  a  pure  endow- 
ment feature,  50.  Policies  classified  according  to 
the  method  by  which  the  proceeds"  are  paid,  52. 
Special  types  of  contracts,  55.  Classification  of 
annuities,  58.  Combination  of  various  types  of 
policies,  59.  The  several  types  of  policies 
equivalent  in  net  cost,  60.  Some  policies  better 
adapted  than  others  to  meet  the  special  needs  of 
the  insured,  60. 

V. — TERM  INSURANCE .     62 

Advantages  of  term  insurance,  63.  Disadvan- 
tages of  term  insurance,  67.  Renewable  and 
convertible  features  in  term  policies,  69. 

VI. — ORDINARY  LIFE  INSURANCE 72 

Furnishes  permanent  protection,  72.  Furnishes 
permanent  protection  at  the  smallest  initial  out- 
lav>  73-  Combines  saving  with  insurance,  74. 
Disadvantage  of  continuous  premium  payments, 

76. 

VII. — LIMITED-PAYMENT  POLICIES     . ' 79 

Necessity  for  larger  premiums  under  this  plan 
during  the  premium-paying  period,  79.  Advan- 
tages of  the  limited-payment  plan,  82.  Paid-up 


CONTENTS  xi 

CHAPTER  PAGE 

and  extension  benefits  under  the  limited-payment 
plan,  85. 

VIII. — ENDOWMENT  INSURANCE 87 

Definition  and  types  of  policies,  87.  Analysis  of 
an  endowment  policy,  88.  Premiums  charged  for 
endowment  policies,  89.  Functions  of  endow- 
ment insurance,  90. 

IX. — INSTALLMENT  POLICIES 99 

The  fundamental  purpose  of  installment  insur- 
ance, 99.  Ordinary  installment  policies,  100. 
Survivorship-annuity  policies,  101.  Continuous- 
installment  policies,  102.  Advantages  of  the  con- 
tinuous-installment plan,  103.  Guaranteed  inter- 
est bonds,  1 06. 

X. — OTHER  LEADING  TYPES  OF  CONTRACTS  .     .     .     .108 

Joint-life  policies,  108.  Premiums  on  joint-life 
policies,  108.  The  use  of  a  joint-life  policy  com- 
pared with  the  use  of  separate  policies  on  the 
sam~  lines,  no.  Annuities,  in.  Immediate  an- 
nuif-es  and  their  advantages,  112.  Other  types 
of  annuities,  114. 

PART  II 
THE  SCIENCE  OF  LIFE  INSURANCE 

XI. — THE  MEASUREMENT  OF  RISK  IN  LIFE  INSURANCE, 

by  Bruce  D.  Mudgett  ........   119 

The  theory  of  probability,  119.  The  laws  of 
probability,  120.  The  use  of  this  theory  to  fore- 
cast future  events,  123.  Accuracy  of  the  theory 
of  probabilities — the  law  of  average,  124.  Mor- 
tality tables,  129.  Sources  of  mortality  tables,, 
130.  Objection  to  tables  based  on  population 
data,  130.  Description  of  a  mortality  table,  131. 
Construction  of  the  mortality  table,  134.  Kinds 


xii  CONTENTS 

CHAPTER  PAGE 

of  tables  and  important  tables  used  in  the  United 
States,  136.  Application  of  the  theory  of  proba- 
bilities to  the  mortality  table,  137. 

XII. — FUNDAMENTAL  PRINCIPLES  UNDERLYING  RATE- 
MAKING,  by  Bruce  D.  Mudgett 139 

Features  peculiar  to  life  insurance,  140.  As- 
sumptions underlying  rate  computations,  142. 

XIII. — THE    NET    SINGLE    PREMIUM,    by    Bruce    D. 

Mudgett 148 

Classification  of  premiums  as  single  and  periodic, 
148.  Classification  of  premiums  as  net  and  gross, 
148.  Term  insurance,  149.  Whole-life  -  insur- 
ance, 154.  Pure  endowments,  158.  Endowment 
insurance,  159. 

XIV. — THE    NET    SINGLE   PREMIUM    (continued),    by 

Bruce  D.  Mudgett 161 

Installment  insurance,  161.  Annuities,  164. 
Deferred  annuities,  168. 

XV. — THE     NET    LEVEL    PREMIUM,    by     Bruce    D. 

Mudgett 174 

The  level,  or  periodic,  premium  system,  174. 
Analogy  between  periodic  premiums  and  annui- 
ties, 175.  Continuous  and  limited  premiums, 
177.  Computation  of  the  net  annual  level  pre- 
mium, 178.  Premiums  paid  at  intervals  of  less 
than  one  year,  185.  Return-premium  policies, 
187. 

XVI. — THE  RESERVE,  by  Bruce  D.  Mudgett  .     .     .     .191 

Financial  importance  of  the  reserve,  191.  The 
origin  of  the  reserve,  192.  Definition  and  pur- 
pose of  the  reserve,  192.  Method  of  calculating 
the  reserve,  196.  Comparison  of  reserves  on  dif- 
ferent interest  bases  and  on  different  policies, 
204. 


CONTENTS  xiii 

SAPTER  PAGE 

XVII. — THE   GROSS   PREMIUM-LOADING,   by   Bruce   D. 

Mudgett 209 

Classification  of  expenses,  210.  The  problem  of 
equitable  distribution  of  expenses,  212.  Methods 
of  loading,  214.  Loading  and  the  incidence  of 
expense,  219. 

XVIII. — SURRENDER  VALUES  AND  POLICY  LOANS  .     .     .  229 

Meaning  of  the  term  "  surrender  value,"  229. 
Extent  to  which  policies  are  lapsed  and  surren- 
dered, 230.  Non- forfeiture  laws,  231.  Liberal- 
ity of  companies  in  the  granting  of  surrender 
values,  233.  Reasons  justifying  a  surrender 
charge,  234.  Various  optional  forms  in  which 
surrender  values  are  granted,  237.  Development 
of  policy  loans,  238.  Nature  of  policy  loans  as 
now  granted,  239.  Advantages  resulting  from 
the  loan  privilege,  240.  Extent  of  policy  loans 
and  the  relation  of  such  loans  to  lapses  and  sur- 
renders, 241. 

XIX. — SURPLUS 245 

Meaning  of  surplus  and  sources  from  which  de- 
rived, 245.  Gain  from  investment  earnings,  246. 
Saving  from  mortality,  246.  Saving  from  load- 
ing, 247.  Gains  from  forfeitures,  248.  Methods 
of  apportioning  the  surplus,  249.  Meaning  of  the 
terms  "divisible  surplus"  and  "dividends,"  251. 
Methods  of  distributing  the  surplus  according  to 
the  time  of  distribution,  252.  How  dividends 
may  be  used,  255. 

PART  III 

SPECIAL  FORMS  OF  LIFE  INSURANCE 
XX. — FRATERNAL  AND  ASSESSMENT  INSURANCE  .     .     .  261 

Extent  of  fraternal  insurance,  261.  Organiza- 
tion, government,  and  legal  status  of  fraternal 


xiv  CONTENTS 

CHAPTER  PAGE 

societies,  261.  Distinctive  characteristics  of  fra- 
ternal insurance,  263.  Various  assessment  plans 
that  have  been  used,  266.  Recent  tendency  to 
adopt  the  protective  features  of  old-line  insur- 
ance, 268.  Recent  legislation  concerning  rate 
adjustments,  269.  Business-assessment  associa- 
tions, 271.  Assessment  plans  used  by  such  as- 
sociations, 272. 

XXI. — INDUSTRIAL  INSURANCE 275 

The  purpose  of  industrial  insurance,  275.  Mag- 
nitude of  the  business,  275.  Comparison  of  in- 
dustrial with  other  forms  of  life  insurance,  277. 
Adjustment  of  the  amount  of  insurance  to  the 
unit  of  premium,  278.  Organization  and  man- 
agement of  the  field  force,  279.  Distinctive  fea- 
tures of  the  policy,  280. 

XXII. — DISABILITY  INSURANCE,  by  Bruce  D.  Mudgett  .  284 

Development  of  disability  insurance,  284.  Rea- 
sons for  the  disability  clause,  286.  Objections 
urged  against  the  disability  clause,  288.  The  dis- 
ability clause  in  practice,  291.  Risks  not  covered 
by  the  disability  clause,  292.  The  definition  of 
disability,  294.  Age  and  time  limits  to  the  ap- 
plication of  the  clause,  297.  Benefits  granted  — 
kinds  and  amounts,  299.  Payment  of  dividends 
after  disability,  301.  Conclusion,  302. 

XXIIL— GROUP  INSURANCE,  by  Ralph  H.  Blanchard  .     .  304 

The  group,  304.  The  policy,  306.  Rates,  306. 
Benefits,  308.  Functions,  309. 

PART  IV 
ORGANIZATION,  MANAGEMENT,  AND  SUPERVISION 

OF  LEGAL-RESERVE  COMPANIES 
XXIV. — TYPES  OF  LEGAL-RESERVE  COMPANIES     .     .     .313 
Distinctive    characteristics    of    each    type,    313. 


CONTENTS  xv 

CHAPTER  PAGE 

Comparison  of  the  stock  and  mutual  plans  as 
regards  the  loading  of  premiums,  314.  Argu- 
ments urged  in  favor  of  each  of  the  plans  for 
charging  premiums,  317.  The  stock  and  mutual 
plans  compared  with  reference  to  the  control  of 
companies,  318.  Arguments  urged  in  favor  of 
each  of  the  plans  of  control,  320.  The  control 
of  mixed  companies,  321. 

XXV. — ORGANIZATION  OF  COMPANIES  ......  324 

Home  office  organization,  324.  The  board  of 
directors  and  the  committees  chosen  from  its 
membership,  326.  Officials  exercising  executive 
control,  328.  Officials  intrusted  with  administra- 
tive functions,  329.  Officials  serving  in  an  ad- 
visory capacity,  330.  Other  departments,  331. 
Agency  organization  and  management,  332.  Re- 
lation between  the  home  office  and  the  field  force, 
333.  Commissions  paid  to  agents,  334.  Types 
of  agency  organization,  335.  The  general- 
agency  system,  336.  The  branch-office  system, 
338.  Arguments  advanced  in  favor  of  the  two 
plans,  339. 

XXVI. — LIFE-INSURANCE  INVESTMENTS 342 

Considerations  that  should  govern  companies  in 
making  their  investments,  342.  State  regulation 
of  investments,  344.  The  extent  and  character 
of  investments,  346.  Nature  and  merits  of  the 
various  types  of  investments,  348.  Rate  of  in- 
terest actually' earned,  352.  Method  of  arriving 
at  the  rate  of  earnings,  353. 

XXVII. — GOVERNMENT  SUPERVISION  OF  LIFE  INSURANCE  .  355 

State  versus  federal  jurisdiction,  356.  Officials 
intrusted  with  supervisory  control  and  their 
duties  and  powers,  356.  Subject  matter  to  which 
state  legislation  especially  applies,  358.  State 
supervision  in  practice,  363.  State  versus  n$- 
control,  364, 


xvi  CONTENTS 

PART  V 

IMPORTANT  LEGAL  PHASES  OF  LIFE 
INSURANCE 

CHAPTER  PAGE 

XXVIII. — LEGAL    INTERPRETATION    OF    THE    POLICY    AND 

APPLICATION 369 

General  rules  underlying  court  decisions  affect- 
ing life  insurance,  369.  The  application  and  its 
interpretation,  372.  Warranties  and  representa- 
tions, 375.  Definition  of  warranties  and  impor- 
tance of  the  same  to  companies,  376.  Classifica- 
tion of  warranties  and  manner  of  stating  the 
same,  377.  State  statutes  relating  to  warranties, 
378.  The  incontestable  clause,  379.  The  suicide 
clause,  38 1»  Other  policy  provisions,  382. 

XXIX. — INSURABLE  INTEREST 384 

Insurable  interest  of  the  insured  in  his  own  life, 
385.  Creditor's  insurable  interest  in  the  life  of 
the  debtor,  386.  Insurable  interest  growing  out 
of  other  business  relations,  388.  Insurable  in- 
terest of  the  assignee,  389.  Insurable  interest 
arising  out  of  ties  of  affection,  blood  or  mar- 
riage, 391.  The  time  and  continuity  of  in- 
surable interest,  392. 

XXX. — THE  LAW  PERTAINING  TO  THE  BENEFICIARY     .  394 

Vested  rights  of  the  beneficiary,  394.  Reserving 
the  right  to  change  the  beneficiary  at  will  — 
claims  of  creditors  where  the  beneficiary  has  been 
thus  named,  397.  Rights  of  creditors  to  life- 
insurance  policies,  402.  Transmissibility  of  the 
beneficiary's  interest,  404.  The  designation  of 
the  beneficiary,  406.  Effect  of  cessation  of  the 
beneficiary's  insurable  interest  in  the  life  of  the 
insured  prior  to  maturity  of  the  contract,  407. 


CONTENTS  xvii 

CHAPTER  PAGE 

XXXI. — LAW  PERTAINING  TO  ASSIGNMENT  OF  POLICIES  .  409 

Policy  restrictions  relating  to  the  assignment  of 
policies  and  the  legal  interpretation  of  the  same, 
410.  State  statutes  affecting  assignments  by 
beneficiaries,  413.  Assignment  of  the  policy  by 
the  assignee — a  policy  of  life  insurance  is  not  a 
negotiable  instrument,  414. 

XXXII. — THE  LAW  PERTAINING  TO  THE  AGENT  .     .     .  416 

State  statutes  regulating  agents,  417.  Policy 
provisions  pertaining  to  agency,  421.  Powers 
of  the  agent,  423.  Agent's  liability  to  his  prin- 
cipal for  injury  occasioned  by  misconduct,  424. 
Legal  effect  of  agent's  opinions  on  the  meaning 
of  provisions  in  the  contract,  424. 

APPENDIX  I. — How      THE      LIFE-INSURANCE      SALESMAN 

SHOULD  VIEW  His  PROFESSION    ....  427 

APPENDIX  II. — SPECIMEN  COPY  OF  AN  ORDINARY  WHOLE- 
LIFE  POLICY,  TOGETHER  WITH  THE  FORM  OF 
APPLICATION 438 

APPENDIX  III. — SPECIMEN  COPY  OF  AN  ADULT  WHOLE- 
LIFE  INDUSTRIAL  POLICY 455 

APPENDIX  IV. — SPECIMEN  COPY  OF  A  WHOLE-LIFE  AN- 
NUITY CONTRACT .  462 

APPENDIX  V. — SPECIMEN  COPY  OF  A  FRATERNAL  BENEFIT 
CERTIFICATE,  TOGETHER  WITH  FORM  OF  AP- 
PLICATION   464 

INDEX      .,,,,, 469 


PART  I 
THE  NATURE  AND  USES  OF  LIFE  INSURANCE 


CHAPTER  I 

NATURE  OF  LIFE  INSURANCE  AND  THE  BASIC 
PRINCIPLES  UNDERLYING  IT 

Definition  and  Extent  of  Life  Insurance. —  Mankind  is 
exposed  to  many  serious  hazards  such  as  fire,  disability  and 
premature  death,  the  happening  of  which,  from  the  stand- 
point of  the  individual,  it  is  impossible  to  foretell  or  pre- 
vent, but  the  effects  of  which,  such  as  the  loss  of  property  or 
earnings,  it  is  highly  important  to  provide  against.  It  is 
the  function  of  insurance  in  its  numerous  forms  to  enable  in- 
dividuals to  safeguard  themselves  against  such  misfortunes 
by  having  the  losses  of  the  unfortunate  few  paid  by  the  con- 
tributions of  the  many  who  are  exposed  to  the  same  risk.  If 
the  hazard  under  consideration  is  that  of  premature  death, 
the  loss  suffered  is  indemnified  through  life  insurance.  From 
the  community  standpoint  life  insurance  may  be  defined  as 
"  that  social  device  for  making  accumulations  to  meet  uncer- 
tain losses  through  premature  death  which  is  carried  out 
through  the  transfer  of  the  risks  of  many  individuals  to  one 
person  or  a  group  of  persons/'  x  From  the  standpoint  of  the 
individual,  however,  life  insurance  may  be  defined  as  con- 
sisting of  a  contract,  whereby  for  a  stipulated  compensation, 
called  the  premium,  one  party  (the  insurer)  agrees  to  pay  the 
other  (the  insured),  or  his  beneficiary,  a  fixed  sum  upon  the 
happening  of  death  or  some  other  specified  event. 

Life  insurance  had  its  origin  much  later  than  the  leading 
forms  of  property  insurance  and  its  real  rise  to  importance 
dates  back  only  about  half  a  century.  The  first  attempts  at 
associated  life  insurance,  as  far  as  is  known,  were  undertaken 
in  Great  Britain.  In  1699  there  was  formed  the  "  Society  of 

i  WILLETT,  ALLAN  H.,  The  Economic  Theory  of  Risk  and  Insur- 
ance, 106. 

3 


4  THE  PRINCIPLES  OF  LIFE  INSURANCE 

Assurance '  lor :  Widows  and  Orphans"  and  in  1706  "The 
Amicable  Society  for  a  Perpetual  Assurance  Office/'  It  has 
been  estimated  that  between  1699  and  1720  probably  fifty  life- 
insurance  schemes  were  started  in  Great  Britain,2  but  all  were 
conducted  under  methods  very  defective  as  compared  with 
those  now  in  general  use;  in  fact,  Mr.  Holcombe  concludes: 
"  It  may  be  taken  as  established  that  no  plan  of  life  insurance 
as  we  now  understand  it  had  been  contemplated  by  any  com- 
pany or  society,  or  had  been  considered  by  any  legislature  in 
Europe  prior  to  the  year  1760."  3  In  1762,  when  the  total 
amount  of  life  insurance  in  Great  Britain  is  said  not  to  have 
exceeded  £350,000,  the  Equitable  Assurance  Society  of  London 
commenced  operations,  and  this  society  may  be  regarded  as 
the  first  to  use  the  modern  system  of  insurance,  its  policies 
being  issued  for  fixed  amounts  and  the  premiums  graded  ac- 
cording to  age. 

But  while  the  institution  of  life  insurance  was  first  care- 
fully studied  and  applied  in  Great  Britain,  its  greatest  growth 
has  been  in  the  United  States,  dating  chiefly  since  the  Civil 
War.  A  few  figures  will  make  clear  the  extent  and  rapidity 
of  this  development.  Exclusive  of  annuity  contracts,  it  has 
been  estimated  that  the  total  number  of  life-insurance  policies 
in  the  United  States  at  the  beginning  of  the  nineteenth  cen- 
tury did  not  exceed  one  hundred.4  By  1860  the  companies 
reporting  to  the  Insurance  Department  of  the  State  of  New 
York  showed  a  total  of  only  56,000  policies  with  a  face  value 
of  $163,000,000,  while  the  annual  premium  income  amounted 
to  only  $4,700,000  and  the  assets  to  $24,000,000.  By  1870 
the  companies  authorized  to  do  business  in  the  state  of  New 
York  showed  the  following  totals :  Annual  premium  income, 
$90,000,000;  number  of  policies,  740,000;  face  value  of  in- 
surance, $2,000,000,000;  and  assets  $270,000,000.5  During 
the  next  decade  the  companies  experienced  a  decline,  but  fol- 

2  HOLCOMBE,  JOHN  M.,  "  Observations  on  Life  Insurance  History/1 
Yale  Insurance  Lectures,  i,  18. 

3  Ibid.,  p.  19. 
*  Ibid.,  p.  24. 
6  Ibid.,  p.  25. 


NATURE  AND  PRINCIPLES  5 

lowing  1880  the  business  enjoyed  a  phenomenal  and  almost 
uninterrupted  growth. 

It  is  possible  to  present  only  approximately  the  total  in- 
surance carried  by  the  numerous  corporations  and  associations 
now  operating  in  the  United  States.  Some  idea,  however,  of 
the  present  magnitude  of  the  life-insurance  business  in  the 
United  States  may  be  obtained  from  the  aggregates  for  the 
year  1913,  published  in  the  Insurance  Year  Book.  At  the 
close  of  that  year,  it  appears  that  as  regards  .259  companies 
the  amount  of  insurance  in  force  aggregated  $20,564,000,000, 
the  annual  premium  income  $715,000,000  and  the  total  in- 
come $925,000,000,  the  annual  payments  to  poHcyholders 
$468,000,000,  and  the  admitted  assets  $4,658,000,000.  To 
these  enormous  totals,  however,  it  is  necessary  to  add  the 
business  of  the  numerous  fraternal  orders  which  grant  in- 
surance. At  the  close  of  1913,  509  such  orders  carried  certifi- 
cates aggregating  $9,622,000,000  while  their  annual  income 
amounted  to  $144,000,000,  their  annual  claims  to  $101,000,- 
000,  and  their  assets  to  $183,000,000.  The  vastness  of  these 
figures  can  scarcely  be  comprehended.  They  testify  to  the 
fact  that  the  value  of  life-insurance  protection  is  rapidly  being 
recognized  by  the  rank  and  file  of  the  nation's  population. 
At  present  over  32,000,000  policies  and  fraternal  certificates, 
aggregating  over  $30,000,000,000  of  insurance,  are  carried  in 
the  United  States,  and  over  $569,000,000  is  distributed  an- 
nually in  claims;  yet  these  enormous  figures  are  small  com- 
pared with  what  they  will  be  at  the  close  of  the  next  genera- 
tion. 

Combination  of  Many  Risks  into  a  Group  Is  Necessary 
to  Make  the  Law  of  Average  Apply. —  Our  definition  of  life 
insurance,  it  will  be  recalled,  involved  "the  transfer  of  risks 
of  many  individuals  to  one  person  or  a  group  of  persons." 
Such  a  combination  of  risks  is  absolutely  essential  if  the  busi- 
ness is  to  be  established  on  a  basis  other  than  speculation  or 
gambling.  To  eliminate  the  speculative  factor  it  is  necessary 
to  proceed  on  the  theory  that  the  larger  the  number  of  separate 
risks  of  a  like  nature  combined  into  one  group,  the  less  un- 


6  THE  PKINCIPLES  OF  LIFE  INSURANCE 

certainty  will  there  be  as  to  the  amount  of  loss  that  will  be 
incurred. 

To  insure  a  single  life  for  $1,000  during  a  given  year,  it  is 
clear,  is  in  the  nature  of  a  gamble,  because  the  individual  must 
either  die  or  survive  that  period,  with  the  result  that  there  is 
either  a  100  per  cent,  loss  or  gain.  If  the  number  of  per- 
sons insured  is  increased  to  one  hundred  the  element  of  un- 
certainty will  still  be  present  to  a  large  extent,  although  the 
variations  in  the  number  dying  or  surviving  the  year  will  be 
much  less  than  that  noted  in  the  preceding  case.  But  if 
500,000  lives  of  similar  physical  condition  are  combined  in  the 
same  group,  and  more  than  that  number  of  lives  are  now  in- 
sured in  each  of  several  American  companies,  the  fluctuation 
in  the  rate  of  death  from  year  to  year  will  vary  only  by  the 
smallest  fraction  of  1  per  cent.,  with  the  result  that  the  com- 
pany will  be  able  to  determine  in  advance  the  amount  of  its 
death  claims  and  thus  to  place  its  business  upon  a  non-specu- 
lative basis.  In  fact,  if  the  number  of  lives  insured  by  a  com- 
pany were  so  large  as  to  make  the  application  of  the  law  of 
average  perfect,  practically  all  uncertainty  as  to  the  amount 
of  loss  that  would  be  experienced  during  a  given  period  would 
be  removed.  As  has  been  well  said : 

When  the  insurance  is  furnished  by  a  company  with  capital 
or  surplus  which  answers  as  a  given  guarantee  of  stability,  it 
becomes  a  business,  instead  of  a  speculation,  the  distinction 
being  that  while  an  individual  who  assumes  a  single  risk  either 
loses  or  gains  thereby  the  whole  amount  involved,  the  company 
which  takes  many,  by  means  of  the  aggregate  business  reduces 
the  possible  variations  to  narrow  limits  and  really  makes  of 
insurance  a  business  attended  with  less  peril  than  almost  any 
other.  .  .  .  During  a  given  year  an  individual  either  dies  or  he 
survives  the  year;  the  result  is  a  100-per-cent.  loss  or 
a  100-per-cent.  gain,  if  one  wagers  upon  the  one  life.  But 
make  one  hundred  thousand  of  these  bets  upon  persons  of 
the  same  age  and  like  physical  condition  and  the  variation  in 
the  result  will  not  be  2  per  cent,  usually,  instead  of  200  per  cent. 
There  is  nothing  more  uncertain  than  life  and  nothing  more 
certain  than  life  insurance.6 

e  DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  4. 


NATURE  AND  PRINCIPLES  7 

Necessity  of  Accumulating  a  Fund  for  the  Payment  of 
Claims. —  While  all  forms  of  insurance  are  alike  in  that  they 
require  for  their  successful  operation  a  combination  of  many 
risks  into  a  group,  they  are  vitally  different  as  regards  the 
nature  of  the  risks  covered.  In  this  respect  the  chief  differ- 
ence between  life  and  other  forms  of  insurance  is  that  in  the 
latter  the  contingency  insured  against  may  or  may  not  hap- 
pen, and  as  regards  the  great  majority  of  policies  written, 
does  not  happen,  while  in  life  insurance  the  event  against 
which  protection  is  granted,  namely  death,  is  a  "  hazard  con- 
verging into  certainty."  It  is  necessary,  therefore,  if  a  life- 
insurance  policy  is  to  protect  the  insured  during  the  whole  of 
life,  to  provide  not  only  against  the  risk  of  death  each  year, 
but  also  to  accumulate  an  adequate  fund  for  the  purpose,  as 
Mr.  Dawson  states,  "of  meeting  at  the  ultimate  limit  of 
human  life  an  absolutely  certain  claim  if  one  has  up  to  that 
time  been  escaped."  7  He  further  adds :  "  It  was  failure  to 
see  the  necessity  for  providing  for  an  increasing  hazard,  con- 
verging into  certainty,  which  has  caused  many  serious  errors 
in  the  fundamental  plans  of  some  institutions  formed  to 
furnish  life  insurance,  and  the  thing  which  separates  plans 
of  insurance  into  sound  and  unsound  is  precisely  whether 
intelligent  regard  for  this  principle  has  guided  the  company 
in  determining  its  rates  of  premium  and  the  management  and 
disposition  of  its  funds."  8 

Necessity  of  Accumulating  This  Fund  According  to  Sci- 
entific Principles  and  a  Workable  Method. —  In  accumulat- 
ing the  fund  referred  to  in  the  preceding  section  it  is  import- 
ant for  the  companies  to  take  into  account  several  other 
characteristics  which  differentiate  life  insurance  from  other 
forms  of  insurance.  In  the  first  place,  the  persons  combining 
for  life  insurance  are  not  of  the  same  age,  and  it  is  clear  that 
on  the  average  those  insuring  at  the  younger  ages  will  live 
much  longer  before  'receiving  payment  on  their  policies  than 
those  who  insure  at  the  older  ages.  Justice,  therefore,  re- 

7  Ibid.,  p.  5. 
s  Ibid.,  p.  7. 


8  THE  PRINCIPLES  OF  LIFE  INSURANCE 

quires  that  the  premium  payments  should  be  graded  according 
to  the  age  when  the  policy  is  issued.  Furthermore,  as  future 
chapters  will  show,  a  great  variety  of  policies  is  on  the  market, 
some  insuring  against  death  for  a  limited  number  of  years 
only  while  others  cover  the  whole  of  life,  some  providing  for 
the  payment  of  premiums  for  a  stated  number  of  years  only 
and  others  for  the  entire  duration  of  the  contract,  some 
promising  the  payment  of  the  face  of  the  policy  in  one  lump 
sum  and  others  for  the  payment  of  that  sum  in  a  fixed  num- 
ber of  installments,  etc.  Here  again  justice  demands  that 
the  rates  for  each  type  of  policy  shall  be  determined  not  only 
with  reference  to  the  age  of  the  insured  at  entry,  but  also 
according  to  the  nature  of  the  protection  promised. 

These  complex  conditions  cannot  be  treated  justly  by  the 
companies  unless  they  follow  scientific  principles  in  the  com- 
putation of  their  rates.  Since  life-insurance  policies  promise 
a  definite  sum  in  the  event  of  death,  and  in  some  instances 
in  the  event  of  survival  at  a  stated  time,  it  is  essential  that 
there  be  an  accurate  determination  of  the  liability  involved 
and  that  an  adequate  premium  be  charged  which  is  just  as 
between  ages  and  types  of  policies.  This  is  especially  im- 
portant because  life-insurance  contracts,  in  contrast  with  most 
other  forms  of  insurance  where  the  policies  are  written  for 
only  one  or  at  most  a  few  years  and  are  subject  to  cancella- 
tion at  the  option  of  either  party,  are  unilateral  as  against  the 
company  and  usually  extend  throughout  life  or  for  long 
periods  of  time.  Later  chapters  will  outline  the  principles 
underlying  the  computation  of  rates,  and  the  matter  will  there- 
fore not  be  discussed  in  detail  at  this  time.  Suffice  it  to  state 
that  the  reasons  just  mentioned  make  it  essential  for  the  com- 
panies to  compute  their  premiums  on  the  basis  of  some  table 
of  mortality  experience  which  will  indicate  to  the  company 
the  probability  of  death  for  average  lives  at  any  age. 

In  addition  to  the  foregoing,  life  insurance  presents  a 
further  problem  as  regards  the  accumulation  of  the  fund 
necessary  to  pay  policy  claims.  Experience  has  shown  that  a 
workable  plan  of  life  insurance  requires  the  charge  of  a  uni- 


NATURE  AND  "PRINCIPLES  9 

form  annual  premium  during  the  premium-paying  period. 
Mathematically,  it  is  possible  to  consider  a  life-insurance 
policy  as  composed  of  a  series  of  one-year  renewable-term  in- 
surances and  to  make  each  year's  premium  just  cover  the  cost 
of  current  protection.  Under  this  plan,  however,  since  the 
rate  of  death  increases  with  increasing  age,  the  premium  will 
become  burdensome  and  at  last  prohibitive,  with  the  result 
that  the  healthy  members  of  the  group  will  withdraw  rather 
than  continue  to  pay  the  greatly  increased  rates.  From  a 
practical  standpoint  it  is  therefore  desirable  in  the  great 
majority  of  cases  to  charge  a  uniform  or  level  annual  premium 
as  contrasted  with  an  increasing  one.  Mathematically,  the 
two  plans  are  the  same,  since  they  are  computed  on  the  basis 
of  the  same  table  of  mortality  experience,  but  the  annual  level 
premium  has  the  great  advantage  of  being  moderate  in  amount 
and  the  same  from  year  to  year,  with  the  result  that  policy- 
holders  remain  satisfied  and  soon  become  accustomed  to  its 
payment. 

But  keeping  the  premium  the  same  from  year  to  year,  in- 
stead of  increasing  it  in  accordance  with  increasing  age,  in- 
volves the  payment  during  the  earlier  years  of  a  sum  over 
and  above  that  required  to  pay  the  current  cost  of  insurance. 
In  other  words  during  the  early  years  the  company  is  accumu- 
lating a  fund  out  of  excess  premiums  which  will  be  drawn 
upon  in  the  later  years  when  the  same  annual  premium 
becomes  insufficient  to  meet  the  current  cost.  This  over- 
charge in  the  yearly  premiums  does  not  belong  to  the  com- 
pany but  is  held  in  trust  for  the  policyholder  at  an  assumed 
rate  of  interest  for  the  purpose  just  indicated.  Considering 
a  large  number  of  policies,  this  overcharge  or  unearned 
premium  (usually  called  the  reserve)  represents  that  sum 
which,  together  with  the  future  premiums  paid  by  policy- 
holders,  will  just  enable  the  company  to  meet  its  claims  ac- 
cording to  the  mortality  table  in  use.  This  method  of  thus 
accumulating  a  reserve  fund  is  fundamental  to  any  sound  plan 
of  life  insurance.  The  extent  of  such  accumulations  by  the 
companies  now  in  operation  in  the  United  States  is  indicated 


10         THE  PEINCIPLES  OF  LIFE  INSUKANCE 

by  the  fact  that  at  the  close  of  1913  the  reserve  value  of  the 
policies  in  force  in  the  259  American  legal-reserve  companies, 
reported  in  the  Insurance  Year  Book,  amounted  to  $3,903,- 
000,000  or  nearly  84  per  cent,  of  their  total  admitted  assets. 

Life  Insurance  Changes  Uncertainty  into  Certainty  and 
Is  the  Opposite  of  Gambling. —  Although  life  insurance 
serves  indirectly  to  increase  the  productivity  of  the  community 
by  eliminating  worry  and  increasing  initiative,  its  direct  eco- 
nomic function  is  to  change  uncertainty  into  certainty  and 
thus  enable  the  insured  to  transfer  the  hazard  of  premature 
death  to  the  insurer  at  the  lowest  possible  cost.  The  real  gain 
from  life  insurance  is  due  to  the  combination  of  many  separ- 
ate risks  into  a  group  with  a  view  to  making  possible  the 
"  substitution  of  certain  for  uncertain  loss."  As  already  ex- 
plained, the  larger  the  number  of  separate  risks  comprising  a 
group.,  the  less  uncertainty  will  there  be  as  to  the  amount  of 
loss,  and  the  less  the  uncertainty  of  loss  the  smaller  will  be 
the  premium  that  the  company  needs  to  collect  annually  from 
the  insured. 

This  function  of  insurance  is  perhaps  most  readily  under- 
stood in  connection  with  fire  insurance.  Thus  let  us  assume 
that  each  of  5,000  persons  owns  a  house  valued  at  $10,000, 
that  all  the  houses  are  alike,  and  that  the  annual  loss  by  fire 
as  regards  the  entire  number,  although  varying  slightly  from 
year  to  year,  averages  one-half  of  1  per  cent,  of  the  value,  or 
$50.  In  the  absence  of  any  system  of  insurance  making  pos- 
sible the  application  of  the  law  of  average,  it  is  clear  that  none 
of  these  owners  can  effect  any  arrangement  which  will  place 
them  in  a  position  of  absolute  security.  At  best  they  can  only 
anticipate  their  uncertain  losses  by  practicing  self -insurance, 
i.e.  by  increasing  their  rentals  by  an  amount  considerably  in 
excess  of  the  average  annual  loss  of  $50.  But  even  assuming 
that  they  can  increase  their  rentals  by  four  or  five  times  the 
amount  actually  necessary  under  a  system  of  insurance,  they 
will  still  remain  subject  to  a  large  gamble.  At  the  end  of 
the  year  the  great  majority  of  these  owners,  since  they  suffer 
no  loss,  would  have  the  entire  extra  sum  collected  from  tenants 


NATUKE  AND  PKINCIPLES  11 

as  a  clear  gain,  while  as  regards  those  unfortunate  few  who 
suffer  a  total  loss  the  extra  sum  collected  would  prove  woe- 
fully inadequate  to  indemnify  the  value  destroyed.  But  let 
us  now  assume  that  these  5,000  house-owners  can  combine 
their  risks  into  a  group.  By  doing  this  they  can  substitute 
for  the  great  uncertainty  of  loss  which  confronted  them  as 
individuals  a  certain  definitely  known  loss,  amounting  on  the 
average  to  $50  per  house  and  $250,000  for  the  group.  This 
sum  plus  a  proper  addition  for  expenses,  contingencies  and 
reasonable  profit,  is  all  that  the  company  needs  to  charge  in 
order  absolutely  to  secure  these  owners  against  the  risk  of  loss 
by  fire.  "  The  risk  that  an  insurance  company  carries  is  far 
less  than  the  sum  of  the  risks  of  the  insured,  and  as  the  size 
of  the  company  increases  the  disproportion  becomes  greater."  9 
Now  just  as  each  house-owner  was  enabled  to  use  fire  in- 
surance to  substitute  certainty  for  uncertainty  at  the  lowest 
possible  cost,  so  it  is  also  possible  through  life  insurance  to 
hedge  against  the  uncertainty  of  life  by  providing  for  the  pay- 
ment of  a  definite  sum  of  money  at  death,  whenever  that  may 
occur,  to  replace  the  economic  value  of  the  deceased  individual. 
From  a  family  and  business  standpoint  nearly  all  lives  possess 
an  economic  value  which  may  at  any  time  be  snuffed  out  by 
death,  and  it  is  as  reasonable  to  insure  against  the  loss  of 
this  value  as  it  is  to  protect  oneself  against  the  loss  of  prop- 
erty. In  the  absence  of  insurance  we  saw  that  property- 
owners  could  at  best  practice  only  some  form  of  self-insurance, 
and  that  it  was  impossible  for  them  to  effect  any  arrange- 
ment which  would  give  absolute  certainty.  Similarly,  in  the 
absence  of  a  system  of  life  insurance  which  makes  possible  the 
application  of  the  law  of  average,  no  arrangement  can  be 
found  which  will  render  certain  the  indemnification  of  the 
value  of  a  human  life  lost  through  death.  The  practice  of 
saving  such  a  sum  in  anticipation  of  probable  death  by  no 
means  takes  the  place  of  insurance  as  an  agency  in  substitut- 
ing certainty  for  uncertainty,  because  saving  requires  time  and 

»WILLETT,  ALLAN  H.,  The  Economic  Theory  of  Risk  and  Insur- 
ance, 168, 


12         THE  PRINCIPLES  OF  LIFE  INSURANCE 

death  may  occur  before  the  savings  fund  has  reached  an  ap- 
preciable size.  Unlike  the  practice  of  saving,  a  life-insurance 
policy  means  certainty  because  it  guarantees  a  definite  estate 
from  the  moment  the  first  premium  is  paid.  Moreover,  it 
furnishes  this  element  of  certainty  to  the  public  at  the  lowest 
possible  cost  since  the  companies  are  enabled  through  the 
combination  of  many  risks  to  determine  the  exact  average 
cost  of  the  protection  for  the  entire  group.  From  the  com- 
pany's point  of  view  we  have  seen  that  life  insurance  is  essen- 
tially non-speculative;  in  fact,  probably  no  other  business 
operates  with  greater  certainty.  But  it  is  equally  important 
to  remember  that  from  the  insured's  point  of  view  life  insur- 
ance is  also  the  antithesis  of  gambling.  Nothing  is  more  un- 
certain than  life,  and  life  insurance  offers  the  only  sure 
method  of  changing  that  uncertainty  into  certainty.  Failure 
of  the  head  of  a  family  to  insure  his  life  against  the  sudden 
loss  of  his  value  through  death  amounts  to  gambling  with  the 
greatest  of  all  chances,  and  the  gamble  is  a  particularly  mean- 
one  since  in  case  of  loss  the  dependent  family  and  not  the 
gambler  must  suffer  the  consequences. 

BIBLIOGRAPHY 

DAWSON,    MILES   M.,   The   Business   of   Life   Insurance.     New 

York,  1911,  chap.  1. 
— — — ,    Elements    of    Life    Insurance.     New    York,    1911, 

chap.  1. 
HOLCOMBE,  JOHN  M.,  "  Economical  Function  of  Life  Insurance 

With  Relation  to  the  Family,"  Yale  Insurance  Lectures,  i, 

26-38. 
— • ,  "Definition  of  an  Insurance  Policy  and  Observations 

on  Insurance  History,"  Yale  Insurance  Lectures,  i,  9-25. 
Mom,,  HENRY,  Life  Assurance  Primer.  New  York,  1907,  chap.  1. 
WILLETT,  ALLAN  H.,  Economic  Theory  of  Risk  and  Insurance. 

New  York,  1901,  chaps,  1,  6,  7. 


CHAPTER  II 
FAMILY  AND  PERSONAL  USES  OF  LIFE  INSURANCE 

The  primary  purpose  of  life  insurance  is  the  protection  of 
the  family.  Every  family  is  dependent  for  subsistence  upon 
an  income  which  necessarily  varies  in  amount  with  the  par- 
ticular circumstances  surrounding  its  case.  In  some  in- 
stances this  income  is  obtained  from  the  return  on  invested 
funds  which  have  been  accumulated  or  inherited,  but  in  the 
overwhelming  majority  of  cases  the  subsistence  of  the  family 
depends  upon  the  current  earnings  of  the  husband.  He  is  the 
breadwinner  who  has  definitely  assumed  responsibility  for  the 
support  of  those  dependent  upon  him,  and  his  wife  and  chil- 
dren have  a  right  to  look  to  him  for  adequate  maintenance. 
His  life  has  a  value  (and  the  same  is  also  often  true  of  the 
mother  or  son)  to  the  dependent  members  of  the  family,  and 
it  is  this  value  of  one  life  in  its  relation  to  another  that  justi- 
fies the  existence  of  life  insurance.  If  a  man  owns  a  house 
or  other  destructible  property  he  usually  allows  little  time  to 
pass  before  insuring  it  in  some  fire-insurance  company.  Yet 
why  consider  the  value  of  property  as  more  important  than  the 
value  of  the  life  of  the  owner,  when  in  the  great  majority  of 
instances  the  value  of  the  latter  to  the  family  exceeds  that  of 
the  former?  Moreover,  the  property  may  never  burn  or  be 
otherwise  destroyed,  since  it  appears  that  only  about  one  fire 
occurs  to  every  one  hundred  and  seventy-five  fire  policies, 
while  death  is  certain  to  happen.  As  Benjamin  Franklin 
aptly  stated:  "A  policy  of  life  insurance  is  the  oldest  and 
safest  mode  of  making  certain  provision  for  one's  family.  It 
is  a  strange  anomaly  that  men  should  be  careful  to  insure 
their  houses,  their  ships,  their  merchandise,  and  yet  neglect 
to  insure  their  lives,  surely  the  most  important  of  all  to  their 
families,  and  more  subject  to  loss/' 

13 


14         THE  PRINCIPLES  OF  LIFE  INSURANCE 

Capitalization  of  the  Value  of  a  Human  Life  and  In- 
demnification of  That  Value. —  Eecognizing  the  value  of  a 
human  life  from  both  the  family  and  the  business  standpoint 
(the  two  being  nearly  always  closely  interrelated),  it  should 
next  be  noted  that  life  insurance  constitutes  the  only  safe 
method  of  indemnification  against  the  loss  of  that  value 
through  death.  Briefly  stated,  life  insurance  makes  possible 
the  capitalization  of  that  value.  By  furnishing  this  capitalized 
value  in  the  event  of  death,  life  insurance  may  be  said  to  per- 
petuate the  earning  capacity  of  the  life  for  the  benefit  of  those 
dependent  upon  it.  Through  experience  and  toil  the  human 
life  may  be  constantly  growing  more  valuable,  the  dependent 
family  in  the  meantime  becoming  more  and  more  accustomed 
to  a  higher  standard  of  living,  and  suddenly  this  entire  value 
may  be  swept  away  by  death.  Unless  some  substitute  —  some 
sort  of  hedge  —  can  be  found  there  will  be  nothing  to  take  the 
place  of  the  economic  value  of  the  deceased.  Life  insurance 
constitutes  such  a  hedge  and  it  should  be  the  purpose  of  every 
man  who  has  assumed  family  obligations  to  take  out  such  an 
amount  of  insurance  —  to  capitalize  himself  to  such  an  extent 
—  that  the  principal  if  put  out  at  the  current  rate  of  interest 
will  yield  an  income  equivalent  to  from  one-third  to  one-half  of 
his  earning  capacity  during  life.  Nearly  all  other  values  are 
being  capitalized  in  this  modern  age,  and  it  is  entirely  proper, 
in  fact  essential,  that  the  value  of  a  human  life  should  also  be 
capitalized. 

This  naturally  brings  up  the  question  as  to  how  much  life- 
insurance  protection  should  be  taken  out  for  dependents. 
While  this  is  a  practical  question  opinions  differ  greatly 
and  everyone  must  answer  the  question  according  to  his 
opportunities  and  obligations.  One  rule  which  has  been  fre- 
quently advanced,  and  which  assumes  that  there  should  be  a 
continuance  to  the  family  of  at  least  one-half  of  the  current 
income  earned  by  the  insured  at  the  time  of  death,  is  to  the 
effect  that  "A  man's  life  insurance  should  be  large  enough, 
when  invested  at  the  current  rate  of  interest,  to  produce  an 
income  half  as  large  as  he  earned  while  living."  '  Others  try 


FAMILY  AND  PERSONAL  USES 


15 


to  arrive  at  some  rough  answer  to  this  question  by  ascertain- 
ing the  principal  which  ought  to  pass  upon  death  to  the  fam- 
ily of  the  insured  in  order  to  purchase  an  "  income  equal  to 
the  insured's  probable  earnings  should  he  survive."  Assum- 
ing that  a  $500  income  is  under  consideration,  the  following 
table  will  serve  to  indicate  the  present  value,  at  4  per  cent, 
interest,  of  such  an  income  during  the  expectancy  of  life  at 
various  ages,  according  to  the  American  Experience  table  of 
mortality.  Thus,  as  the  management  of  one  company  states : 
"  At  age  30,  a  sum  of  $9,332,  computed  at  4  per  cent,  interest, 
or  of  $8,187,  computed  at  5  per  cent.,  would  be  required  to 
produce  an  income  of  $500  per  annum  for  thirty-five  years, 
which  is  the  life  expectancy  of  a  person  aged  30,  and  an 
insurance  of  $9,332,  or  of  $8,187,  according  to  the  rate  of 
interest,  would  be  required  to  indemnify  his  family  fully  for 
the  loss  of  $500  income  which  would  be  occasioned  by  his 
death  thirty-five  years  in  advance  of  his  expectancy."  If  an 
income  of  $1,000  per  annum  were  under  consideration  the 
amount  of  insurance  would  be  twice  that  indicated. 


AGE 

EXPECTANCY 

INSURANCE 

VALUE 

4  PER  CENT. 

INSURANCE 
VALUE 

5  PER  CENT. 

25 
30 
35 
40 
45 
50 
55 
60 

38 
35 
31 
28 
24 
20 
17 
14 

$9684 
9332 
8794 
8331 
7623 
6795 
6083 
5281 

$8434 
8187 
7796 
7449 
6899 
6231 
5637 
4949 

The  Duty  to  Insure. — Since  life  insurance  furnishes  the 
surest  method  of  hedging  the  family  against  the  uncertainty 
of  life,  it  is  essential  that  all  who  have  assumed  family  obliga- 
tions should  use  it  as  a  means  of  protecting  dependents  against 
the  want  that  may  be  occasioned  by  an  untimely  death.  Tke 
capitalization  of  the  value  of  a  human  life  for  the  benefit  of 
the  household  depending  upon  it  is  a  fundamental  duty  that 


16          THE  PKINCIPLES  OF  LIFE  INSURANCE 

should  be  given  the  widest  publicity  through  the  pulpit,  the 
school  and  the  press.  In  the  great  majority  of  instances, 
life  insurance  is  the  only  recourse  open  to  the  man  of  moder- 
ate income  who  finds  it  difficult  or  impossible  by  force  of  cir- 
cumstances to  accumulate  a  savings  fund  for  those  dependents 
who  may  outlive  him. 

The  growth  of  life  insurance  implies  an  increasing  develop- 
ment of  the  sense  of  responsibility.  The  idea  of  providing 
only  for  the  present  must  give  way  to  a  recognition  of  the  fact 
that  a  person's  responsibility  to  his  family  is  not  limited  to  the 
years  of  survival.  Emphasis  should  be  laid  on  the  "  crime  of 
not  insuring,"  and  the  finger  of  scorn  should  be  pointed  at 
any  man  who,  although  he  has  provided  well  while  alive,  has 
not  seen  fit  to  discount  the  uncertain  future  for  the  benefit 
of  a  dependent  household.  As  already  explained,  life  in- 
surance is  the  only  sure  means  of  changing  uncertainty  into 
certainty  and  is  the  opposite  of  gambling.  He  who  does  not 
insure  gambles  with  the  greatest  of  all  chances  and,  if  he  loses, 
makes  those  dearest  to  him  pay  the  forfeit.  That  the  gamble 
is  a  risky  one  is  easily  demonstrated  by  any  mortality  table, 
and  even  if  life  is  granted  until  age  50,  let  it  not  be  overlooked 
that  less  than  one  in  ten  of  our  population  succeeds  in  accumu- 
lating a  reasonable  competence,  and  that  through  reverses  a 
great  majority  of  this  limited  number  lose  the  same  by  the 
time  that  age  is  reached.  Woman's  rights  as  well  as  her  duty 
in  the  matter  of  life  insurance  should,  also  be  emphasized. 
She  should  be  taught  that  it  is  not  only  her  husband's  duty 
adequately  to  protect  the  family,  if  that  is  at  all  possible,  but 
that  it  is  also  her  duty,  if  necessary,  to  use  her  persuasive 
powers  to  get  him  to  act,  and  if  that  does  not  avail,  to  insist 
on  action  as  her  right.  Not  only  has  she  a  right  to  personal 
protection,  but  her  rights  as  regards  life  insurance  are  further 
increased  by  her  interest  in  the  children  which  are  as  much 
hers  as  they  are  her  husband's. 

In  addition  to  the  advantage  of  life  insurance  as  a  direct 
protection  to  the  family,  it  also  benefits  the  policyholder  per- 
sonally in  a  number  of  important  ways.  Six  advantages  de- 


FAMILY  AND  PEKSONAL  USES  17 

serve  special  mention  in  this  respect  and  all,  it  should  be 
noted,  redound  to  the  benefit  of  the  policyholder's  family  by 
qualifying  him  better  to  meet  its  obligations  and  to  protect 
its  comfort  and  happiness. 

Eliminates  Worry  and  Increases  Initiative. —  Writers 
have  frequently  asserted  that  life  insurance  is  not  to  be  re- 
garded as  a  producer  of  wealth  but  that  its  function  is  merely 
to  distribute  funds  from  the  fortunate  to  the  unfortunate. 
In  reality,  however,  life  insurance  will  be  found  to  be  a 
powerful  indirect  force  in  the  production  of  wealth  in  that  it 
relieves  the  policyholder  of  worry  and  increases  his  efficiency. 
Constant  worry  is  one  of  the  greatest  curses  that  can  fall  to  the 
lot  of  man,  and  life  insurance,  if  universally  used,  would  lift 
that  curse  from  innumerable  shoulders.  The  knowledge  of 
an  assured  estate  from  the  moment  the  premium  is  paid  will 
enable  the  insured  to  feel  freer  to  take  the  initiative.  Let 
us  assume  that  the  head  of  a  family  is  the  possessor  of  $10,- 
000  and  is  afforded  an  excellent  opportunity  for  the  invest- 
ment of  this  capital  in  a  business  pursuit.  If  it  were  not  for 
life  insurance  the  owner  of  this  capital  could  not  safely  afford 
to  invest  this  sum  and  assume  the  speculative  hazard  con- 
nected with  most  business  enterprises  because  of  the  fear  that 
this  capital  might  be  lost,  and  that  in  case  of  premature  death 
no  provision  would  exist  for  those  dependent  upon  him.  Life 
insurance,  however,  furnishes  a  hedge  against  such  a  con- 
tingency and  assures  the  prospective  investor  in  this  instance 
that  in  case  of  his  death  and  the  loss  of  his  investment,  the 
insurance  company  will  reimburse  his  dependents  to  the  ex- 
tent of  $10,000.  By  thus  removing  a  load  of  care  from  the 
mind  life  insurance  promotes  efficiency  and  makes  life  hap- 
pier. For  this  reason  life  insurance  should  be  regarded  by 
the  average  man  as  one  of  his  most  treasured  possessions,  and 
premium  payments  should  not  be  looked  on  merely  as  an 
expense  to  be  grudgingly  borne.  It  may  safely  be  stated  that 
the  possession  of  an  adequate  amount  of  life  insurance  causes 
the  average  policyholder  to  eat  better,  sleep  better,  feel  better, 
and  as  a  result  of  these,  to  work  better. 


18  THE  PRINCIPLES  OF  LIFE  INSURANCE 

Life  Insurance  Makes  Saving  Possible. — One  constantly 
meets  with  those  whose  argument  against  life  insurance  is  that 
they  prefer  to  save.  The  habit  of  saving  should  by  all  means 
be  encouraged,  but  it  should  be  borne  in  mind  that  the  saving 
•of  a  competence  involves  the  necessary  time  to  save,  and  that 
life  insurance  is  the  only  certain  method  to  use  as  a  hedge 
against  the  possibility  of  the  saving  period  being  cut  short. 
A  policy  of  saving  can  yield  only  a  small  amount  at  the  start, 
while  a  policy  of  insurance  from  its  beginning  guarantees  the 
full  face  value  and  thus  safeguards  the  policyholder  against 
failure  through  early  death  to  have  sufficient  time  to  save 
adequately  through  other  channels.  Thus,  if  one  is  able  to 
save  $500  annually  it  will  take  nearly  fifteen  years  to  accumu- 
late a  fund  of  $10,000,  assuming  that  the  accumulations  are 
safely  invested  annually  at  4  per  cent,  compound-  interest. 
Yet  the  resolution  of  the  head  of  the  family  to  protect  the 
home  with  such  a  savings  fund  is  contingent  upon  his  sur- 
viving the  full  period,  and  may  be  defeated  by  death  before 
the  savings  have  reached  any  appreciable  sum.  To  depend 
entirely  on  saving  as  a  means  of  providing  for  the  future  of 
the  family  is,  to  say  the  least,  a  highly  uncertain  policy  to 
pursue.  The  first  requisite  in  providing  for  the  future  sup- 
port of  dependents  is  absolute  certainty,,  and  this  can  be 
secured  only  by  using  life  insurance  as  a  hedge  against  the 
possible  failure  to  continue  the  annual  accumulations  to  the 
.savings  fund  because  of  early  death.  Through  life  insurance 
the  suggested  fund  of  $10,000  can  be  assured  in  any  case. 
Upon  death  the  insurance  company  pays  the  face  of  the  policy, 
•while  in  case  of  survival  the  insured  is  given  the  necessary 
time  to  accumulate  a  competence. 

Moreover,  the  roseate  views  which  so  many  hold  concern- 
ing their  resolution  and  ability  to  accumulate  and  keep  should 
be  tempered  by  a  frank  statement  of  the  distressing  facts  as 
they  actually  exist.  Eighty-five  per  cent,  of  this  country's 
adults  leave  no  estate  at  all,  and  about  one-third  of  the 
widows  in  the  country  lack  the  necessities,  and  90  per 
cent,  the  comforts,  of  life.  The  habit  of  saving,  as  already 


FAMILY  AND  PERSONAL  USES  19 

stated,  should  be  encouraged,  but  the  foregoing  facts  clearly 
indicate  that  it  is  unwise  to  practice  saving  to  the  exclusion 
of  life  insurance.  Both  should  be  practiced,  and,  if  only  one 
is  possible  because  of  limited  means,  insurance  should  be 
selected  because  of  its  much  greater  certainty  in  leaving  a 
stipulated  fund  for  the  support  of  the  family  whenever  the 
breadwinner's  income-producing  capacity  is  cut  short  by  death. 
Furnishes  a  Profitable  and  Safe  Investment. — In  addi- 
tion to  guaranteeing  an  estate  at  once,  life  insurance  contains 
an  investment  feature  which  is  absolutely  -safe  and  which 
reaches  large  proportions  in  the  later  years  of  the  policy. 
With  the  exception  of  a  few  types  of  policies  only,  life  insur- 
ance represents  an  accumulation  of  savings  admirably  adapted 
to  put  small  sums  of  money  to  prompt  and  profitable  use,  and 
in  this  respect  has  been  aptly  defined  as  "  compound  interest 
in  harness."  As  will  be  explained  later,  nearly  all  types  of 
life-insurance  policies  gradually  accumulate  a  so-called  sur- 
render value  which  may  be  withdrawn  by  the  insured  if  he 
decides  to  discontinue  the  policy.  This  value,  as  will  be 
shown  later,  represents  an  accumulation  of  a  portion  of  the 
premiums  paid  by  the  policyholder  which  the  company 
promptly  invests  at  an  assumed  rate  of  interest ;  and  in  mutual 
companies  the  interest  earnings  in  excess  of  this  assumed  rate 
are  returned  to  the  policyholder.  In  other  words  this  value 
of  the  policy  represents  savings  left  with  the  company.  Past 
experience  shows  that  on  the  average  life-insurance  companies 
have  earned  on  the  savings  left  with  them  by  policyholders 
the  largest  interest  returns  consistent  with  safety.  Owing  to 
the  mathematical  and  scientific  character  of  life  insurance 
and  the  stringency  of  government  supervision  of  the  com- 
panies, there  has  not  been  a  failure  of  a  large  and  well- 
established  life-insurance  company  in  the  last  quarter  of  a 
century,  and  this  is  true  despite  the  fact  that  we  have  wit- 
nessed three  severe  financial  panics  during  the  last  twenty- 
five  years.  Nearly  every  company  devotes  the  greatest  care 
to  its  investments,  which  are  spread  out  over  such  a  large 
number  of  securities  and  other  forms  of  property  that  a  loss 


20         THE  PKINCIPLES  OF  LIFE  INSURANCE 

on  one  investment  will  be  fully  counterbalanced  by  profits  on 
another.  The  investments  of  nearly  every  large  company  are 
in  the  special  care  of  investment  managers,  and  the  skill  with 
which  they  are  made  may  be  illustrated  by  the  experience  of 
one  of  the  largest  companies  in  America,  which,  valuing  its 
securities  at  the  lowest  quotations  prevailing  in  the  severe 
panic  of  1893,  could  still  show  an  excess  of  $20,000,000  over 
and  above  the  purchase  price  of  those  same  securities.  More- 
over, an  examination  of  the  present  earnings  of  life-insurance 
companies,  shows  that  the  great  majority  make  between  4% 
and  5  per  cent,  on  their  total  assets,  while  in  some  instances  the 
returns  exceed  this  amount. 

Not  only  does  life  insurance  thus  furnish  a  profitable  and 
safe  investment,  but  modern  policies  also  make  it  possible 
for  the  insured  to  arrange  for  the  safeguarding  of  the  pro- 
ceeds of  the  policy  upon  his  death  for  the  benefit  of  his  bene- 
ficiaries. Too  frequently  the  competence  which  a  husband 
or  father  has  provided  through  saving  or  insurance  is  quickly 
lost  by  the  heir  or  beneficiary  through  speculation,  unwise 
investments,  or  excessive  expenditures  for  unnecessary  com- 
forts. Such  a  contingency  should  always  be  contemplated  by 
the  insured  and  may  be  prevented  in  various  ways.  Modern 
income  policies,  especially,  furnish  a  guarantee  against  such 
a  contingency  by  providing  that  the  beneficiary  shall,  follow- 
ing the  death  of  the  insured,  receive  during  the  whole  of  her 
life,  or  for  a  designated  number  of  years  as  the  case  may  be, 
an  annual,  quarterly  or  monthly  income  of  a  stipulated  sum. 
Or,  instead  of  having  the  proceeds  of  the  policy  paid  in  one 
lump  sum  upon  death,  the  insured  may  arrange  to  have  the 
company  retain  the  sum  upon  the  maturity  of  the  policy  and 
pay  the  same  in  a  designated  number  of  installments.  Again, 
the  proceeds  of  the  policy  may  be  left  with  the  company  for 
safe-keeping  for  a  designated  number  of  years. 

Forces  and  Encourages  Thrift. —  Not  only  does  life  in- 
surance render  safe  the  insured's  effort  to  accumulate  a  fund 
through  saving  by  hedging  him  against  early  death,  or  itself 
furnish  a  profitable  and  safe  investment,  but  for  the  great 


FAMILY  AND  PERSONAL  USES  21 

majority  of  people  it  constitutes  an  excellent  means  of  en- 
couraging and  even  forcing  thrift.  There  are  few  institutions, 
if  any,  which  have  given  such  excellent  schooling  along  this^ 
line.  Savings  banks,  of  course,  do  their  share  in  developing 
the  saving  instinct  among  the  masses  and  building  and  loan 
associations  have  also  assumed  a  prominent  position  in  this 
respect.  But,  usually,  institutions  of  this  character  have  the 
shortcoming  that  they  permit  the  depositor  to  withdraw  all 
or  nearly  all  of  the  funds  after  giving  notice  of  a  certain  num- 
ber of  weeks,  with  the  result  that  a  resolution  to  save  over  a 
long' period  may  be  broken  when  the  depositor  for  one  reason 
or  another  sees  fit  to  withdraw  the  amount  deposited. 

In  life  insurance  nearly  all  the  types  of  contracts  sold  con- 
tain a  savings  feature,  and  this  is  especially  true  of  the  so- 
called  endowment  policy  which,  as  will  be  explained  more  fully 
later,  promises  the  payment  of  a  stipulated  sum  not  only  upon 
•the  death  of  the  insured  during  a  given  term  of  years  but  also 
upon  his  survival  at  the  end  of  that  term.  Of  course,  in  order 
to  receive,  say,  $10,000  at  the  end  of  fifteen  or  twenty  years  the 
insured  is  obliged  to  pay  to  the  company  a  sufficient  amount 
in  annual,  semi-annual  or  quarterly  premiums  to  enable  the 
company,  after  improving  these  payments  at  compound  inter- 
est, to  accumulate  a  fund  by  the  end  of  the  period  which  will 
equal  the  sum  stipulated  in  the  contract.  Whatever  the  policy- 
holder  has  accumulated  to  his  credit  cannot  as  a  rule  be 
withdrawn  from  the  company  during  the  first  two  or  three 
years,  and  it  is  also  the  general  practice  to  apply  a  penalty 
in  the  form  of  a  surrender  charge  in  case  of  withdrawal  dur- 
ing a  considerable  number  of  years  following  the  payment  of 
the  third  premium.  Furthermore,  the  regular  payment  of 
the  premium  from  year  to  year  will  soon  be  looked  upon  by 
the  insured  in  much  the  same  manner  as  he  comes  to  regard 
interest  upon  a  mortgage.  Consequently  to  secure  the  neces- 
sary funds  to  pay  the  premium  his  industry  will  be  con- 
siderably enhanced  or  his  efforts  to  save  the  required  premiums 
out  of  income  will  be  increased.  In  fact,  it  is  the  common 
assertion  of  innumerable  individuals  who  were  the  holders  of 


22  THE  PRINCIPLES  OF  LIFE  INSURANCE 

endowment  policies  that  at  the  end  of  fifteen,  twenty,  or 
twenty-five  years  they  became  the  possessors  of  a  considerable 
sum  of  money  which,  under  other  circumstances  they  would 
never  have  accumulated,  or  which,  if  they  had  done  so,  would 
have  been  lost  or  dissipated.  Life  insurance,  in  other  words, 
tends  to  bring  about  compulsory  saving,  and  represents  the 
accumulation  of  small  sums  (which  in  all  probability  would 
not  otherwise  be  accumulated)  over  a  long  period  of  years  into 
a  substantial  sum.  In  brief,  life  .insurance  generally  bears 
the  relationship  to  thrift  that  the  modern  utilization  of  by- 
products (largely  wasted  in  former  years)  bears  to  many  of 
our  leading  manufacturing  enterprises  of  to-day. 

Facilitates  the  Purchase  of  a  Home. — While  this  advan- 
tage may  be  considered  essentially  a  business  one,  it  is  men- 
tioned here  because  of  the  enormous  volume  of  outstanding 
mortgages  on  homes  and  the  direct  bearing  of  this  situation  in 
nearly  all  cases  upon  the  welfare  of  the  mortgagor's  family. 
One  who  has  purchased  or  built  a  home  with  funds  borrowed 
on  a  mortgage  which  provides  for  payment  at  a  specified  date 
is  exposed  to  the  danger  of  dying  before  a  fund  sufficient  for 
such  payment  has  been  accumulated.  Let  us  assume  that  the 
head  of  a  family  has  mortgaged  his  home  for  $5,000  and 
expects  to  pay  off  the  same  through  a  series  of  payments  at 
fixed  intervals,  such  payments  being  made  out  of  current  earn- 
ings. It  is  apparent  that  the  fulfilment  of  this  purpose  is 
dependent  upon  the  mortgagor  living  long  enough  to  earn 
the  amounts  necessary  to  make  the  periodic  payments.  Pre- 
mature death,  however,  after  only  a  few  payments  have  been 
made,  may  seriously  jeopardize  the  welfare  of  the  family,  since 
the  remaining  members  of  the  household  may  be  unable  to 
effect  a  settlement  of  the  mortgage  and  thus  prevent  a  fore- 
closure on  their  home  at  a  time  when  troubles  are  amply 
abundant.  Here  life  insurance,  involving  only  a  moderate 
cost,  affords  an  excellent  protection  against  such  a  contin- 
gency. A  $5,000  life-insurance  policy  may  be  taken  out  by 
the  mortgagor  to  hedge  his  $5,000  mortgage.  If  his  life  is 
spared  he  will  pay  off  the  mortgage  and  because  of  a  little 


FAMILY  AND  PERSONAL  USES  23 

extra  thrift,  will  also  be  the  holder  of  $5,000  life  insurance, 
the  beneficent  purpose  of  which  as  family  protection  will  by 
that  time  be  appreciated.  If  death,  however,  should  occur 
when  only  $1,000  has  been  paid  on  the  mortgage,  the  proceeds 
of  the  policy  become  immediately  available  for  the  extin- 
guishment of  the  balance  of  $4,000.  The  family  thus  becomes 
possessed  of  full  title  to  the  home,  while  the  balance  of  $1,000 
of  life-insurance  money  will  prove  exceedingly  welcome  as  a 
means  of  tiding  over  the  period  of  adjustment  that  nearly 
always  arises  when  the  breadwinner  is  removed  by  death. 

The  same  situation  also  presents  itself  on  every  hand  among 
the  large  farmer  and  retailing  classes  of  the  country.  Here 
a  vast  volume  of  mortgages  covers  the  farms  and  small  retail 
establishments  in  which  the  mortgagors'  families  have  a  vital 
interest.  Foreclosure  of  the  property  in  case  of  failure  to 
meet  the  mortgage  because  of  the  mortgagor's  untimely  death, 
or  serious  hardship  on  the  part  of  the  heirs  in  attempting  to 
pay  off  the  mortgage,  can  easily  be  obviated  through  the  use 
of  life  insurance.  The  possibilities  of  the  spread  of  life  in- 
surance among  the  farmers  of  this  country  are  exceedingly 
great,  because  as  a  class  they  stand  sadly  in  need  of  its  pro- 
tection and  at  present  know  comparatively  little  about  its 
usefulness. 

Furnishes  an  Assured  Income  in  the  Form  of  Annuities. 
— Life  insurance  also  proves  valuable  to  a  very  considerable 
number  of  people,  who,  as  the  result  of  a  lifework  have  suc- 
ceeded in  saving  only  a  limited  amount  of  capital,  and  who 
have  no  one  to  whom  they  particularly  care  to  transfer  this 
sum  in  case  of  death.  Thus,  let  us  assume  that  a  person  aged 
60  has  accumulated  $10,000,  and  that  this  represents  the 
entire  estate  available  for  the  maintenance  of  the  owner  dur- 
ing his  later  years.  Owing  to  the  limited  size  of  the  estate, 
the  owner  will  be  obliged  to  invest  the  same  in  the  most  care- 
ful manner,  and  the  current  rate  of  return  for  such  invest- 
ments would  probably  not  exceed  4  per  cent.  Consequently 
this  individual's  income  will  be  limited  to  $400,  an  amount  in- 
sufficient for  proper  maintenance  during  old  age.  Nor  can  he 


24         THE  PRINCIPLES  OF  LIFE  INSURANCE 

afford  to  take  a  portion  of  his  principal  for  living  expenses, 
because  this  would  reduce  his  annual  income.  The  danger 
confronting  him  is  just  the  opposite  of  that  facing  the  man 
who  wants  insurance  against  death.  The  latter  wants  insur- 
ance because  he  does  not  know  how  long  he  will  live,  while 
the  former  is  confronted  with  the  danger  of  living  too  long, 
i.e.  of  outliving  his  income. 

Just  as  the  man  who  felt  that  death  might  intervene  too 
soon,  could  hedge  himself  against  that  risk,  so  our  owner  of 
the  $10,000  fund,  who  feels  that  his  income  is  too  limited  and 
that  he  might  outlive  this  income  if  he  should  resort  to  the 
expenditure  annually  of  a  portion  of  the  principal,  can  pro- 
tect himself  by  buying  an  "  annuity."  An  annuity  is  a  con- 
tract by  which  an  insurance  company  promises  to  pay  the 
holder  thereof  a  certain  stipulated  income  every  year  as 
long  as  he  lives,  the  payment  ceasing  upon  death.  Thus,  for 
illustrative  purposes,  let  us  apply  an  annuity  to  a  man  aged 
60  who  has  saved  $10,000,  which  sum,  as  stated,  will  yield  only 
$400  income  a  year  if  invested  at  4  per  cent.  Now,  to  quote 
the  rates  of  a  certain  company  for  annuities,  this  individual 
may  deposit  $1,066  and  receive  therefor  a  promise  of  an 
income  of  $100  a  year  throughout  life.  This  sum,  it  will  be 
observed,  represents  a  yield  of  9  per  cent,  or  more  than  twice 
as  much  as  the  assumed  current  rate  of  4  per  cent.  The 
older  the  annuitant  is  when  he  buys  an  annuity  the  larger  is 
the  annual  return  the  company  can  afford  to  give.  Thus  if 
the  individual,  assumed  in  our  illustration,  should  be  sixty- 
six  years  old  this  same  company  promises  him  $100  a  year 
throughout  life  for  each  $888  paid  in,  or  over  11  per  cent. 
At  age  70  the  $100  annuity  will  cost  only  $630,  or  an  annual 
return  four  times  greater  than  the  4  per  cent,  rate  used  for 
illustrative  purposes.  If,  therefore,  the  holder  of  a  limited 
estate  does  not  particularly  care  to  transfer  his  property  to 
some  individual  or  institution,  life  insurance  makes  it  possible 
for  him  to  pay  the  same  to  an  insurance  company  in  return 
for  a  promise  of  a  certain  definite  income  a  year,  thus  reliev- 
ing him  from  all  further  worry  as  to  the  sufficiency  of  his 


FAMILY  AND  PEKSONAL  USES  25 

future  income.  The  companies  can  afford  to  give  these  large 
returns  at  the  later  years  of  life  because  the  death  rate  at  age 
60  and  thereafter  is  high  and  because  of  the  understanding 
that  the  annuities  will  cease  just  as  soon  as  the  annuitant 
dies,  in  which  case  the  balance  of  the  money  deposited  with 
the  company  goes  to  the  benefit  of  the  other  annuitants  who 
may  survive. 

The  Relation  of  the  Foregoing  Advantages  to  Society  at 
Large. —  The  many  advantages  discussed  in  the  preceding 
pages,  it  is  apparent,  will  greatly  benefit  the  community  as  a 
whole  if  life  insurance  is  widely  used.  Mr.  Holcombe  writes : 

It  is  clear  that  any  agency  which  improves  the  mental  or 
moral  attributes,  or  the  material  circumstances  of  any  one  of 
its  citizens,  raises  the  condition  of  the  community  of  which  he 
is  a  member,  and  thus  benefits  the  state.  Savings  banks  en- 
courage thrift  and  produce  accumulations  which  would  in  many 
cases  be  otherwise  wasted,  and  thus  they  constitute  a  distinct 
and  tangible  benefit  to  the  state.  Life  insurance  promotes  a 
sense  of  responsibility,  strengthens  family  ties,  and  thus  ele- 
vates the  general  character  of  the  nation.  "It  lessens  those  fam- 
ily discords  which  end  in  divorce,  it  checks  intemperance,  and 
often  by  its  requirements  brings  a  realization  of  the  benefits 
of  right  living.  .  .  .  There  can  be  no  doubt,  furthermore,  that 
life  insurance  curtails  the  expense  to  the  public  treasury,  of 
almshouses  and  police,  of  criminal  courts  and  prisons,  and  of 
the  various  other  necessary  branches  of  the  public  service  which 
have  to  do  with  the  prevention  and  punishment  of  crime,  and 
the  relief  of  the  suffering  and  unfortunate.  ...  It  is  certain 
that  in  many  cases  the  proceeds  of  a  life-insurance  policy  are 
practically  all  that  remain  at  the  death  of  the  one.  responsible 
for  the  support  of  helpless  dependents,  and  in  a  vast  number 
of  these  cases,  were  it  not  for  this  aid,  many  persons  would  be 
forced  to  accept  public  charity.1 

The  value  of  life  insurance  as  an  agency  for  increasing  the 
individual's  sense  of  responsibility,  and  for  relieving  the  com- 
munity of  much  needless  expense  in  supporting  members  of 
destitute  families,  has  been  recognized  for  years  by  the  gov- 

1  Yale  Insurance  Lectures  i,  39,  41. 


26  THE  PRINCIPLES  OF  LIFE  INSURANCE 

ernments  of  all  civilized  countries.  As  early  as  1840  the  state 
of  New  York  enacted  legislation  to  the  general  effect  that  any 
life-insurance  policy  taken  out  for  the  benefit  of  a  married 
woman,  or  assigned  to  or  held  in  trust  for  her,  or  which  in 
case  of  her  death  before  payment  is  to  inure  to  the  use  of  her 
or  her  husband's  children,  was  to  be  free  from  all  claims  of 
creditors.  A  large  number  of  our  states  have  since  enacted 
legislation  substantially  similar  in  character,  the  laws,  how- 
ever, usually  providing  that  if  the  annual  premium  on  said 
insurance  should  exceed  a  stipulated  amount  (usually  $300) 
the  excess  together  with  interest  should  be  available  for 
satisfying  the  claims  of  creditors  of  the  person  paying  the 
premium.  Many  foreign  governments  have  also  done  every- 
thing possible  to  encourage  the  taking  out  of  life  insurance 
by  adopting  a  very  lenient  policy  of  taxation,  although  this 
very  commendable  method  of  encouraging  the  spread  of 
life-insurance  protection  has  been  neglected  or  refused  by  the 
several  American  commonwealths. 

In  conclusion,  two  general  benefits  of  life  insurance  not  yet 
discussed  should  briefly  be  referred  to  as  vitally  affecting  the 
entire  community.  These  are: 

1.  Through  their  ejiormous  investments  life-insurance  com- 
panies have  exerted  a  powerful  influence  in  the  upbuilding  of 
the  industrial  life  of  the  nation.  Two  hundred  and  fifty- 
nine  companies,  reported  in  the  Insurance  Year  Book,  1913, 
show  total  admitted  assets  of  $4,658,696,337,  of  which 
$1,617,873,512  represent  investments  in  real-estate  mort- 
gages and  $1,994,722,971  in  corporate  bonds  and  stocks.  The 
significance  of  these  large  totals  becomes  apparent  when  it  is 
stated  that  they  represent  the  contributions  over  a  long  series 
of  years  of  millions  of  policyholders,  each  of  whom  has  con- 
tributed his  little  mite.  The  companies,  in  other  words,  have 
been  the  medium  through  which  a  vast  aggregation  of  small 
sums  has  been  devoted  to  the  furtherance  on  a  large  scale  of 
the  nation's  leading  business  interests.  The  investments  of 
nearly  two  billion  dollars  in  bonds  and  stocks  will  be  found 
to  be  fairly  well  distributed  over  the  principal  transportation 


FAMILY  AND  PERSONAL  USES  27 

and  other  corporate  properties  of  the  country  and  represent  a 
very  substantial  part  of  the  total  funds  that  have  been  neces- 
sary for  their  development.  The  $1,600,000,000  of  real-estate 
mortgages  also  represent  investments  in  properties  located  in 
all  parts  of  the  country.  Because  of  such  loans,  owners  of 
real  estate  have  been  enabled  to  erect  buildings  or  otherwise 
improve  their  properties.  Not  only  have  large  sums  been 
furnished  for  the  development  of  cities  and  towns,  but  for 
many  years  the  companies  have  granted  loans  upon  western 
and  southern  farming  lands,  thus  enabling  the  purchase, 
stocking,  and  cultivation  of  large  areas. 

2.  By  carefully  restricting  the  admission  to  membership 
and  by  requiring  answers  to  numerous  questions  relating  to 
intemperate  habits,  the  applicant's  attention  is  forcefully 
directed  to  the  close  relationship  between  temperate  living 
and  longevity.  Physical  ailments  are  also  frequently  dis- 
covered for  the  first  time  as  a  result  of  the  physical  examina- 
tions which  the  companies  require  all  applicants  to  undergo. 
The  knowledge  thus  obtained  leads  to  the  application  of 
remedies,  and  results  in  the  conservation  of  the  value  of  many 
lives  for  the  benefit  of  the  community. 

The  movement  toward  the  conservation  of  health  and  life 
is  receiving  increasing  attention  on  the  part  of  the  com- 
panies, and  has  been  a  subject  for  special  consideration  by 
various  prominent  life-insurance  associations.  Various  com- 
panies are  already  pursuing  a  policy  of  disseminating  advice 
for  the  treatment  of  various  diseases  and  of  offering  periodical 
health  examinations  for  the  detection  of  ailments.  While  the 
movement  is  yet  in  its  infancy  the  tremendous  possibilities 
for  good  along  this  line  cannot  be  overemphasized,  and  the 
desirability  of  having  life-insurance  companies  participate* 
actively  in  a  comprehensive  conservation  movement  is  appar- 
ent. The  possibilities  along  this  lin'e  have  ably  been  set  forth 
by  the  Life  Extension  Institute,  Inc.  In  a  recent  circular  on 
"  Life  Extension  Service  for  Life  Insurance  Companies  "  the 
promoters  of  this  Institute  show  clearly  the  desirability  of 
*'  checking  the  life  waste  that  is  going  on  in  our  country  as  a 


28         THE  PRINCIPLES  OF  LIFE  INSURANCE 

result  of  ignorance  or  defiance  of  the  simple  laws  of  health/' 
and  express  their  belief  that  "  by  the  study  of  problems  relat- 
ing to  national  vitality,  by  disseminating  knowledge  of  per- 
sonal hygiene  and  the  science  of  disease  prevention,  and  by 
offering  and  encouraging  periodical  health  examinations  to 
detect  disease  in  time  to  check  or  cure  it,  a  substantial  con- 
tribution to  longevity  and  to  human  happiness  generally  will 
be  made/' 


CHAPTEE  III 
BUSINESS  USES  OF  LIFE  INSURANCE 

So-called  "  business  "  or  "  commercial "  life  insurance  has 
assumed  large  proportions  only  within  the  present  decade. 
While  the  primary  purpose  of  life  insurance  is  to  protect  the 
family  against  the  loss  of  the  income-producing  capacity  of  the 
breadwinner,  it  is  becoming  clear  that  the  business  enter- 
prises of  the  country  likewise  have  need  of  protection  against 
the  loss  of  the  valuable  lives  that  give  them  vitality  and  suc- 
cess. During  the  last  few  years  the  business  world  seems  to 
have  discovered  this  fact,  and  as  a  result  an  enormous  amount 
of  insurance  has  been  written  on  the  lives  of  business  men 
who  have  had  in  mind  chiefly  the  stabilizing  of  their  business 
through  the  establishment  of  better  credit  relations  and  the 
procurement  of  protection  against  the  loss  through  death  of 
those  most  valuable  to  its  success.  So  large  is  the  volume 
of  business  insurance  becoming,  and  so  rapid  is  its  increase 
that  there  is  good  reason  to  believe,  as  one  writer  on  the  sub- 
ject recently  stated,  that  "  the  time  is  fast  coming  when  the 
life-insurance  policy  will  be  almost  as  integral  a  part  of  cor- 
porate and  copartnership  structure  as  are  the  charter,  the 
bond,  the  stock  certificate,  and  the  articles  of  copartner- 
ship." 1  The  business  uses  of  life  insurance  afford  a  boundless 
field  for  study  and  thought,  because  there  are  few  men,  indeed, 
who  do  not  at  some  time  face  a  business  situation,  the  solution 
of  which  will  be  made  simpler  and  less  hazardous  through  the 
medium  of  some  kind  of  life  insurance. 

Close  Relationship  Between  the  Home  and  Business. — 
Business  life  insurance  should  particularly  appeal  to  a  busi- 

i  ANDERSON,  STEWART,  "  Commercial  Life  Insurance,"  published  in 
H.  P.  Dunham's  The  Business  of  Insurance,  I,  387, 

29 


30  THE  PRINCIPLES  OF  LIFE  INSURANCE 

ness  man  when  it  is  shown  that  in  nearly  all  instances  there  is 
a  very  close  relationship  between  his  home  and  the  business 
in  which  he  is  engaged.  So  close  is  this  relation  that  a 
policy  taken  for  the  special  conservation  of  the  business  may 
often  prove  even  more  valuable  than  a  policy  taken  out  for 
the  direct  protection  of  the  family.  The  latter  policy  can 
seldom  do  more  than  alleviate  in  a  measure  the  financial 
injury  caused  by  the  death  of  the  income-producer,  while  the 
former  may  be  the  means  of  successfully  continuing  in  opera- 
tion the  business  of  the  deceased.  Had  not  the  former  policy 
been  taken  out  the  business  might  have  failed  or  declined. 
The  family  policy  usually  assures  the  continuance  of  a  portion 
only  of  the  insured's  income  during  life,  while  the  business 
policy,  since  it  conserves  the  efficiency  of  the  insured's  busi- 
ness, may  be  instrumental  in  bringing  about  the  continuation 
of  a  much  larger  income,  viz.,  the  income  from  a  successful 
business. 

Moreover,  the  owner  of  a  business,  generally  speaking,  con- 
ducts the  same  primarily  with  a  view  to  supporting  a  home, 
thus  again  showing  that  the  welfare  of  the  home  and  the  wel- 
fare of  the  business  are  so  intimately  related  as,  generally 
speaking,  to  be  inseparable.  On  the  one  hand  the  advantages 
of  family  insurance  as  discussed  in  the  preceding  chapter, 
such  as  freedom  from  worry,  increase  in  initiative,  etc.,  will 
produce  a  very  wholesome  effect  upon  the  welfare  of  the  in- 
sured's business,  and  business  success  means,  as  a  rule, 
family  happiness  and  contentment.  On  the  other  hand  busi- 
ness adversity  practically  always  means  family  adversity,  and, 
therefore,  business  insurance  which  protects  the  business 
against  disaster  is  in  reality  also  family  insurance  since  it 
preserves  the  family's  interest  in  the  income  derived  from  that 
business. 

The  speculative  risks  connected  with  nearly  all  business  pur- 
suits and  the  danger  of  meeting  with  business  failure  need 
not  be  outlined  to  men  of  experience.  Suffice  it  to  say  that 
compilations  show  that  the  number  of  actual  business  failures 
is  exceedingly  large,  that  the  amount  of  failure  liabilities  over 


BUSINESS  USES  31 

a  series  of  years  is  about  the  same  as  the  total  fire  loss  and  is 
equally  subject  to  great  fluctuations  because  of  unforeseen 
contingencies,  and  that  the  probability  of  business  mortality 
is  about  as  great  as  human  mortality  at  age  41.  It  is  also 
noteworthy  that  in  a  year  like  1907  approximately  one-fifth 
of  the  total  number  of  business  failures,  involving  over  55  per 
cent,  of  the  total  failure  liabilities,  was  due  to  disasters, 
failure  of  apparently  solvent  debtors  and  undue  competition  — 
causes  which  cannot  be  considered  as  due  to  the  faults  of  those 
who  failed  —  while  another  37  per  cent,  of  the  failures  were 
traceable  to  lack  of  capital  and  5  per  cent,  to  inexperience. 
In  every  community  we  meet  with  instances  of  once  prosperous 
families  reduced  to  straitened  circumstances  through  failure 
brought  about  by  the  sudden  death  of  the  head  of  the  business 
or  of  a  valued  official  or  employee.  At  such  a  time  all  adverse 
influences  will  seem  to  operate  at  once  against  the  credit 
facilities  and  the  competing  powers  of  the  business,  with  the 
result  that  the  enterprise  may  go  under  because  of  lack  of 
capital  and  the  inexperience  of  the  survivors.  But  the  cruel- 
est  results  of  business  failures  become  apparent  when  we  note 
the  effects  upon  the  homes  of  the  deceased  and  surviving  part- 
ners. Here  the  reduced  income  may  necessitate  moving  to 
humble  quarters,  curtailing  expenses,  and  withdrawing  the 
children  from  school  or  college.  That  such  occurrences  should 
be  so  common  is  truly  a  pity  when  by  the  employment  of  life 
insurance  the  business  might  easily  have  been  protected  against 
the  dangers  referred  to. 

Life  Insurance  as  a  Means  of  Indemnification  Against 
Loss  Through  the  Death  of  Officials  and  Valuable  Employ- 
ees.—  Turning  now  to  a  discussion  of  the  numerous  business 
uses  to  which  life  insurance  lends  itself,  we  find  that  one 
field  for  its  application  consists  of  the  numerous  businesses 
which  depend  upon,  in  fact  have  been  built  around,  some  one 
man  whose  capital,  energy,  technical  knowledge,  experience, 
or  power  to  plan  and  execute  make  him  a  most  valuable  asset 
of  the  organization  and  a  necessity  to  its  successful  operation. 
Numerous  examples  may  be  pointed  to  as  illustrating  the  de- 


32         THE  PRINCIPLES  OF  LIFE  INSURANCE 

pendence  of  successful  business  upon  the  personal  equation. 
Thus  a  corporation  or  firm  may  be  vitally  interested  in  ene  of 
its  officers  whose  financial  worth  as  an  indorser,  or  whose 
ability  as  an  executive,  may  be  the  basis  of  its  bond  issues  or 
bank  credit.  A  manufacturing  or  mining  enterprise  may  be 
dependent  upon  someone  who  alone  possesses  the  chemical  or 
engineering  knowledge  necessary  to  the  concern.  A  publish- 
ing house  may  have  engaged  someone  who  alone  can  be  the 
author  of  a  proposed  work  and  may  be  obliged  to  incur  con- 
siderable outlay  before  it  is  written.  The  sales  manager  of  a 
large  business  establishment  may  have  made  himself  indis- 
pensable through  his  ability  to  organize  an  efficient  body  of 
salesmen,  to  employ  the  most  effective  methods  of  selling, 
and  to  develop  profitable  markets.  Again,  some  officer  of  the 
concern,  although  not  actively  engaged  in  its  daily  operations, 
may  prove  indispensable  because  he  is  its  principal  owner  and 
because  his  experience  and  business  connections  make  him 
its  chief  adviser. 

These  are  only  a  few  illustrations  of  the  many  that  might  be 
given  to  show  the  importance  of  a  human  life  as  an  asset  to  the 
successful  operation  of  a  business.  Now  why  not  insure  the 
business  against  the  loss  of  that  life  —  that  asset  —  through 
death?  Surely,  the  extinction  of  such  valuable  lives  will  in 
many  instances  prove  a  more  serious  loss  than  that  by  fire  or 
any  of  the  other  sources  of  loss  in  business  against  which 
insurance  is  invariably  procured.  The  death  of  the  officer 
whose  indorsement  or  executive  ability  is  the  basis  for  the 
firm's  bank  and  bond  credit  might  result  in  a  refusal  on  the 
part  of  lenders  to  renew  old  and  make  new  loans,  thus  possibly 
jeopardizing  the  business  because  of  a  lack  of  capital.  If 
adequately  insured,  however,  for  the  benefit  of  the  business, 
the  firm  would  immediately  upon  his  death  receive  the  face 
value  of  the  policy.  Not  only  would  the  insurance  proceeds 
help  to  enable  the  company  to  meet  any  obligations  falling 
due  during  the  period  of  adjustment,  but  the  mere  knowledge 
that  the  business  was  the  recipient  of  a  large  amount  of  cash 
would  be  a  powerful  factor  in  allaying  doubt  and  in  restoring 


BUSINESS  USES  33 

confidence  on  the  part  of  creditors.  Similarly  the  death  of 
the  person  who  alone  possessed  the  chemical  and  engineering 
knowledge  required  by  his  employer  might  result  in  the  lower- 
ing of  the  quality  or  the  volume  of  the  output  of  the  com- 
modity in  question,  thus  causing  much  inconvenience  and  pos- 
sible loss  of  business;  while  the  death  of  the  sales  manager 
might  involve  the  disintegration  of  the  selling  force  and  the 
consequent  loss  of  profitable  markets.  Furthermore,  in  many 
instances  an  untimely  death  may  leave  a  special  piece  of  work 
unfinished  and  subject  the  employer  to  a  loss  of  the  advances 
made,  since  no  one  else  can  be  found  to  bring  the  unfinished 
project  to  completion.  Here  the  amount  of  life-insurance  pro- 
tection may  be  made  to  equal  approximately  the  outlay  in- 
curred, and  if  the  work  is  known  to  require  only  a  few  years 
for  its  completion,  the  term  of  the  policy  may  be  made  to 
cover  only  this  limited  period.  Such  short-term  policies  also 
often  prove  desirable  for  the  protection  of  a  business  against 
the  death  of  its  owner  or  manager  during  the  first  five  or  ten 
years  required  for  the  business  to  become  firmly  established. 
All  losses  of  a  character  like  those  enumerated  may  be 
guarded  against  by  making  the  business  the  beneficiary  of  a 
sufficiently  large  policy  on  the  lives  of  the  officers  or  employees 
under  consideration.2  In  the  event  of  death  the  business  will 

2  The  following  may  be  mentioned  as  a  few  of  the  notable  in- 
stances of  business  insurance  which  are  commonly  cited  as  illus- 
trative of  the  extent  to  which  certain  men  use  life  insurance  for  the 
benefit  of  copartnerships  and  corporations:  George  E.  Nicholson, 
Kansas  City,  $1,500,000  in  favor  of  four  cement  companies  of  which 
he  is  president;  H.  N.  Byllesby,  Chicago,  $1,250,000  as  managing 
engineer  of  electric  companies;  John  H.  Jones,  Pittsburgh,  $1,000,000 
in  favor  of  the  Pittsburgh-Buffalo  Co.,  of  which  he  is  president; 
John  H.  MacMillan,  Minneapolis,  $500,000  in  favor  of  the  Carigal 
Elevator  Co.,  of  which  he  is  vice-president;  F.  B.  Wells  and  F.  T. 
Heffelfinger,  Minneapolis,  $500,000  each  in  favor  of  the  F.  H.  Peavey 
Co.;  and  Arthur  S.  Ford,  $1,000,000  in  favor  of  the  Portland  Cement 
Co.,  of  which  he  is  treasurer. 

Mr.  Edward  A.  Woods,  in  a  recent  address  on  "The  Use  of  Life 
Insurance  in  Bank  Credit,"  states :  "  Among  conspicuous  illustra- 
tions of  insurance  more  or  less  for  the  purpose  of  protecting  credit 
is  the  insurance,  said  to  be  $3,500,000,  carried  by  John  Wanamaker, 


34  THE  PRINCIPLES  OF  LIFE  INSURANCE 

promptly  be  indemnified  for  the  loss  of  the  services  of  the 
deceased,  and  the  proceeds  received  will  enable  it  to  bridge  over 
the  period  necessary  to  secure  the  services  of  a  worthy  suc- 
cessor. Mr.  Stewart  Anderson  writes: 

In  the  conservation  of  business,  many  other  kinds  of  insur- 
ance, highly  useful  because  deeply  needed,  are  employed  — 
fire,  casualty,  surety,  employers'  liability,  title,  plate  glass,  etc. 

—  but  none  of  these,  except  casualty  (and  that  only  in  case  of 
accident),  defends   against  loss   or  destruction   caused  by  the 
death  of  a  man  who  is  the  blood,  brains,  gold,  and  very  life  of 
the  business.     Curious  omission,  dangerous  neglect,  is  it  not? 

—  fire  ?    insurance ;    embezzlement  ?    insurance ;    accident   to    a 
workman?  insurance;  title?  insurance;  broken  pane  of  glass? 
insurance !  —  but  against  the  staggering  loss  or  the  supreme 
disaster  of  total  ruin  following  the  snuffing  out  of  a  man  upon 
whom  the  whole  fabric  of  the  business  rests  —  no  insurance!  and 
that  snuffing  out  occurs  in  innumerable  cases  as  quickly  and  as- 
suddenly  as  the  smashing  of  a  plate  glass  front.     Business  has- 
greater  need  of  life  insurance  than  of  any  other  kind,  because 
it  is  the  only  form  that  completely  encircles  with  impregnable 
protection  against  utter  destruction  through  death.3 

The  Use  of  Partnership  Insurance. —  To  an  increasing  ex- 
tent copartners  in  any  line  of  business  find  it  advisable  to 
insure  their  lives  for  the  benefit  of  their  firm.  This  may  be 
done  in  one  of  two  ways :  either  each  member  of  the  partner- 
ship may  take  out  a  separate  policy  on  his  life  and  make  the 
same  payable  to  the  firm,  or  to  the  surviving  member  or  mem- 
bers of  the  firm;  or  the  insurance  may  be  taken  jointly  upon 
all  or  any  number  of  the  partners,  the  contract  in  this  instance 
(called  a  joint-life  policy)  promising  payment  to  the  firm  or 

and  the  $4,000,000  carried  by  his  son  Rodman  Wanamaker;  the 
$1,000,000  carried  by  Harry  G.  Selfridge  in  establishing  his  Ameri- 
can department  store  in  London;  the  $500,000  on  the  late  Charles 
Netcher,  the  department  store  manager  of  Chicago,  who  died  while 
enlarging  his  store,  the  prompt  payment  of  which,  after  but  one 
premium  was  paid,  largely  assisted  his  wife  in  continuing  the  busi- 
ness and  suggested  her  carrying  $1,200,000  insurance  herself." 

3  ANDERSON,  STEWART,  "  Commercial  Life  Insurance,"  in  H.  P. 
Dunham'?  The  Business  of  Insurance,  i,  chap.  23,  p.  389. 


BUSINESS  USES  35 

its  surviving  partners  in  the  event  of  the  death  of  any  one  of 
the  members  covered  by  the  policy.  Under  either  method  the 
premiums  will  be  paid  by  the  firm  just  as  in  the  case  of  fire 
and  other  forms  of  property  insurance.  Should  a  dissolution 
of  the  partnership  occur  the  joint-life  policy,  if  it  is  so  desired, 
may  be  converted  into  separate  policies  for  equitable  amounts 
upon  the  lives  comprising  the  membership  of  the  firm.  If,  on 
the  other  hand,  the  partnership  insurance  originally  consisted 
of  separate  policies,  the  death  of  any  partner  would  cause  his 
insurance  to  be  paid  to  the  firm,  the  other  policies  continuing 
in  force  as  before  for  the  benefit  of  the  business.  Moreover, 
in  case  of  dissolution  the  firm  may  surrender  the  policy  for 
its  cash  value  or  the  retiring  partner  may  purchase  his  policy 
from  the  firm  arid  continue  it  as  his  own  insurance  for  the 
benefit  of  his  estate  or  some  designated  beneficiary. 

The  numerous  benefits  derived  from  partnership  insurance 
become  apparent  upon  a  consideration  of  the  many  diffi- 
culties that  may  confront  a  copartnership  upon  the  death  of 
one  of  the  members  of  the  firm.  In  most  partnerships  the 
several  partners  not  only  have  supplied  their  respective  por- 
tions of  the  necessary  capital,  but  each  is  a  specialist  in  some 
particular  department.  The  death  of  any  member  of  the  firm, 
therefore,  may  involve  not  only  the  withdrawal  of  his  share 
of  the  capital  by  his  heirs  but  the  loss  of  his  skill  and  active 
cooperation.  If,  however,  the  deceased  partner  has  been  in- 
sured for  the  benefit  of  the  firm,  the  proceeds  of  the  policy 
will  enable  the  surviving  partners  to  pay  off  his  interest  to  his 
heirs  and  carry  on  the  business  without  delay  and  embarrass- 
ment during  the  time  necessary  to  find  a  successor.  Fre- 
quently the  purchase  of  the  deceased  partner's  interest  becomes 
highly  desirable,  especially  where  the  business  is  a  specialized 
one,  in  order  to  prevent  that  interest  from  coming  under  the 
control  of  persons  in  the  firm  who  may  be  entirely  ignorant 
of  the  business  and  possibly  hostile  to  its  management. 

Again,  the  death  of  a  copartner,  usually  implying  the  loss 
of  skill  and  the  withdrawal  of  capital,  often  awakens  doubt 
and  fear  among  the  firm's  creditors  with  the  result  that  at  the 


36         THE  PRINCIPLES  OF  LIFE  INSURANCE 

very  time  when  the  deceased  partner's  heirs  are  clamoring  for 
the  withdrawal  of  their  interest  the  firm  is  subjected  to  the 
embarrassing  situation  of  having  its  loans  called  and  its 
requests  for  credit  refused.  When  bankers  and  other  creditors, 
however,  know  that  the  deceased  partner's  life  was  insured  for 
the  benefit  of  the  firm,  credit  is  immediately  established  and 
confidence  takes  the  place  of  doubt.  The  value  of  life  insur- 
ance in  this  respect  is  well  recognized  by  bankers,  wholesale 
houses  and  commercial  agencies.  Banks  at  present  almost 
invariably  require  prospective  borrowers  to  reveal  the  amount 
of  life  insurance  they  carry  for  the  benefit  of  their  business. 
Commercial  agencies  also  consider  this  matter  important  when 
reporting  upon  the  financial'  standing  of  business,  as  was 
clearly  indicated  by  the  late  Charles  F.  Clarke,  President  of 
the  Bradstreet  Company,  when  he  wrote :  "  It  is  practically 
beyond  a  doubt  that  corporation  insurance  strengthens  the 
credit  of  firms  adopting  it.  The  increased  confidence  which 
it  establishes  is  recognized  in  the  mercantile  community  and 
thus  reflected  through  our  reports/'  This  is  merely  one  of 
many  statements  which  might  be  furnished  to  indicate  the 
growing  conviction  that  partnership  insurance  is  an  agency 
which  strengthens  credit  at  all  times  and  furnishes  a  quick 
asset  when  credit  is  impaired,  which  safeguards  the  deceased 
partner's  interest  and  permits  its  withdrawal  without  em- 
barrassment to  the  firm,  which  provides  ready  cash  to  pay  off 
indebtedness  and  to  replace  in  a  measure  at  least  the  loss  of 
the  deceased  partner's  services,  and  which  makes  possible  the 
retention  of  the  management  and  control  of  the  business  by 
the  surviving  members. 

The  Insurance  of  Employees  for  the  Benefit  of  Their 
Families. —  Thus  far  attention  has  been  called  to  the 
insurance  of  officials  and  valuable  employees  for  the  bene- 
fit of  the  business  with  which  they  are  connected.  Numer- 
ous policies,  however,  are  issued  to-day  which  have  for 
their  purpose  the  insurance  of  the  rank  and  file  of  the  em- 
ployees in  any  given  line  of  business  for  the  benefit  of  their 
families,  although  the  employer  pays  all  or  a  portion  of  the 


BUSINESS  USES  37 

premiums.  Although  such  insurance  appears  to  be  primarily 
family  insurance,  it  also  serves  a  useful  business  purpose  in 
increasing  the  efficiency  of  the  employer's  working  force. 
Long  service  on  the  part  of  employees  is  deemed  desirable  by 
employers  as  one  of  the  best  means  of  keeping  up  the  quality 
and  keeping  down  the  cost  of  the  product.  Frequent  change 
in  the  labor  force  not  only  necessitates  constant  instruction, 
but,  in  the  long  run,  spells  loss  through  inefficiency.  It  is, 
therefore,  with  a  view  to  lengthening  the  service  of  its  em- 
ployees that  many  corporations  and  firms  have  adopted  the 
profit-sharing  plan  or  are  maintaining  for  their  employees, 
at  considerable  expense,  comprehensive  pension  or  insurance 
plans. 

A  great  variety  of  methods  is  used  in  this  respect,  but  all 
have  the  same  general  purpose,  viz.,  the  elimination  of  the 
loss  that  is  connected  with  frequent  changes  in  the  working 
personnel.  Sometimes  the  employer  accomplishes  this  pur- 
pose through  a  plan  of  self-insurance,  while  in  other  in- 
stances the  insurance  protection  is  obtained  from  a  company. 
Sometimes  the  plan  simply  provides  for  the  payment  to  the 
deceased  employee's  family  of  a  stipulated  pension  or  a  lump 
sum  of  insurance,  while  in  other  instances,  and  this  is  com- 
ing to  be  regarded  as  preferable,  the  insurance  does  not  ma- 
ture as  a  lump  sum  payment  but  the  proceeds  are  paid  to  the 
beneficiary  in  annual,  semi-annual,  quarterly  or  monthly  in- 
stallments. Again  the  employer  may  seek  to  bind  his  em- 
ployees to  himself  by  rewarding  them  with  an  endowment 
policy  which  provides  for  the  payment  of  a  stipulated  sum 
either  in  the  event  of  death  during  a  given  period  like  twenty 
years,  or  upon  their  survival  of  that  period.  If  the  employee 
dies  during  this  period  and  while  still  in  the  service  of  the 
employer,  the  proceeds  of  the  policy  pass  to  the  employee's 
family  either  under  the  lump  sum  or  installment  plans  of 
payment.  If,  however,  the  employee  remains  with  the  busi- 
ness during  the  entire  twenty  years  the  proceeds  will  at  the 
end  of  that  period  be  paid  to  him  directly.  Should  the  em- 
ployee cease  to  remain  in  the  business,  the  employer  usually 


38  THE  PRINCIPLES  OF  LIFE  INSURANCE 

has  the  'option  of  surrendering  the  policy  for  its  cash  value, 
or  of  permitting  the  employee,  if  he  is  willing  to  refund  the 
back  premiums,  .to  take  over  and  himself  carry  the  policy  to 
its  maturity. 

Life  Insurance  as  Security  for  Bond  Issues. —  Life  insur- 
ance may  also  conveniently  be  used  as  a  hedge  against  the 
possible  failure  to  pay  a  bond  issue  at  maturity.  Thus, 
:let  us  assume  that  a  firm  wishes  to  raise  $50,000  on  bonds 
^which  will  mature  in  twenty  years,  and  that  the  nature  and 
<  organization  of  the  business  are  such  as  to  make  it  chiefly 
(dependent  for  its  credit  and  successful  operation  upon  the 
life  of  one  man.  Under  such  circumstances  the  unexpected 
death  of  this  individual  might  ruin  the  company  to  such  an 
extent  that  the  liquidation  of  its  assets  might  not  prove  suffi- 
cient for  the  full  redemption  of  the  bonds.  Unless  some 
means  can  be  found  which  will  assure  the  creditors  that  the 
bonds  will  be  redeemed  upon  maturity,  the  loan  will  in  all 
probability  not  be  effected  at  all  or  only  under  severe  restric- 
tions and  at  a  very  high  rate  of  interest. 

Proper  security  to  the  creditors  may  conveniently  be  fur- 
nished in  this  instance  through  the  medium  of  endowment 
insurance.  In  other  words,  the  head  of  the  business  may 
insure  his  life  for  $50,000  under  a  twenty-year  endowment 
policy.  In  case  of  survival,  the  business  is  likely  to  prosper 
with  the  result  that  the  security  back  of  the  bonds  will  greatly 
increase.  In  that  case  the  endowment  policy  will  serve  the 
purpose  of  creating  a  sinking  fund  which  increases  year  after 
year  until  at  the  end  of  twenty  years  it  will  amount  to  $50,- 
•000  or  just  the  sum  needed  to  redeem  the  bond  issue  then 
falling  due.  On  the  other  hand,  should  the  insured  die  be- 
fore the  expiration  of  the  twenty-year  period,  and  this  is  the 
real  contingency  that  the  creditors  desire  to  be  protected 
.against,  the  business  at  once  receives  the  full  face  value  of 
the  policy.  The  firm  would  thus  have  on  hand  sufficient  funds 
to  pay  off  the  bonds  at  once  if  that  were  possible  and  desira- 
ble. But  if  it  is  found,  instead,  that  the  business  can  be 
-continued  advantageously,  such  a  portion  of  the  $50,000  of 


BUSINESS  USES  SO 

insurance  money  may  be  set  aside  in  a  sinking  fund  as  will 
at  the  current  rate  of  interest  amount  to  $50,000,  or  the  face 
of  the  bond  issue,  at  the  end  of  the  twenty-year  period.  The 
balance  of  the  insurance  money  not  needed  for  the  sinking 
fund  may  be  used  for  the  improvement  of  the  business,  thus 
in  turn  still  more  enhancing  the  security  back  of  the  bond 
issue. 

Similar  in  nature  to  the  above  function  is  the  further  use 
of  life  insurance  as  a  means  of  accumulating  a  sinking  fund 
for  the  benefit  of  such  institutions  as  schools,  colleges, 
churches  and  hospitals.  Many  times  such  institutions  are 
largely  dependent  upon  the  efforts  and  generosity  of  one  man 
or  a  limited  number  of  men.  While  he  or  they  live  the  insti- 
tution prospers,  but  in  the  event  of  unexpected  death,  the 
absence  of  ample  endowment  funds  compels  retrenchment 
and  consequently  impairment  of  usefulness.  Such  a  con- 
tingency the  supporters  of  the  institution  may  obviate  by  tak- 
ing out  endowment  insurance  in  its  behalf.  In  case  of  death 
the  institution  receives  at  once  the  face  of  the  policy,  while 
in  the  event  of  survival  the  policy  will  enable  the  insured 
gradually  to  accumulate  a  sinking  fund  to  be  turned  over  to 
the  institution  in  question  at  the  expiration  of  the  term. 
During  the  last  few  years  the  graduating  classes  of  a  number 
•of  leading  universities  and  colleges  have  also  adopted  this 
method,  and  it  is  mentioned  here  merely  as  illustrative  of 
the  numerous  ways  in  which  the  principle  may  be  applied,  as 
a  convenient  method  of  raising  a  substantial  class  fund  for 
their  Alma  Mater.  The  plan  adopted  consists  in  each  mem- 
ber of  the  class  pledging  himself  to  take  and  maintain,  say,  a 
$250  or  $500  twenty-year  endowment  policy,  the  university 
or  college  being  named  the  beneficiary.  In  this  way  one  hun- 
dred graduates  by  setting  aside  the  small  sum  of  only  about 
314  or  Qy2  cents  a  day  can  during  the  twenty-year  period, 
using  as  a  basis  the  present  experience  of  the  average  Ameri- 
can company,  accumulate  approximately  $25,000  or  $50,000^ 
as  a  class  fund.  Ask  these  one  hundred  persons  twenty  years 
from  date  to  give  that  sum.,  and  the  refusal  will  be  general. 


40         THE  PKINCIPLES  OF  LIFE  INSURANCE 

Through  the  use  of  the  endowment-insurance  plan,  however, 
this  substantial  result  can  be  obtained  at  a  sacrifice  so  small 
as  to  be  hardly  worth  mentioning.  It  is  practically  certain 
that  the  sum  involved,  owing  to  its  smallness,  would,  in  the 
absence  of  this  plan,  have  been  wasted  in  daily  expenditures 
for  trifles,  and  the  large  sum  that  may  be  secured  through 
endowment  insurance  may  therefore  be  regarded  as  the  utili- 
zation of  a  by-product  —  odds  and  ends  that  would  not  other- 
wise have  been  saved  —  for  a  noble  purpose. 

The  Use  of  Life  Insurance  as  a  Means  of  Enhancing  the 
Credit  of  Business  Enterprises  During  Times  of  Financial 
Stringency. —  Just  as  endowment  insurance  proves  serviceable 
as  a  means  of  accumulating  a  substantial  fund  without  the 
insured  being  conscious  of  any  sacrifice,  so  nearly  all  other 
forms  of  life-insurance  policies,  as  will  be  explained  more 
fully  later,  contain  a  savings  feature,  although  in  none  does 
that  feature  appear  so  prominently  as  in  the  ordinary  types 
of  endowment  policies.  Nearly  all  policies  are  paid  for  by 
an  annual  premium  which  is  uniform  throughout  life  or  the 
premium-paying  period,  with  the  result  that  the  company 
gradually  accumulates  through  overcharges  in  the  early  years, 
when  the  premium  is  more  than  sufficient  to  meet  the  current 
cost  of  insurance,  a  fund  which  when  improved  at  interest 
at  an  assumed  rate  will  just  enable  the  company  to  meet 
its  claims  as  they  mature.  On  a  whole-life  policy,  for  exam- 
ple, this  fund  reaches  large  proportions  in  the  course  of  years.4 
It  follows,  therefore,  that  the  taking  out  of  life-insurance 
policies  from  time  to  time,  made  payable  to  either  the  in- 
sured^ estate  or  to  his  business,  means  the  gradual  accumu- 
lation of  increasing  cash  or  loan  values  which  are  obtainable 
at  any  time  by  surrendering  the  policy  or  by  borrowing  against 
its  cash  value. 

It  is  not  intended  here  to  encourage  the  altogether  too 
common  habit  of  borrowing  the  loan  value  of  policies,  because 

*  The  extent  to  which  the  cash  or  loan  value  of  a  policy  increases 
in  the  course  of  years  is  indicated  by  the  table  on  page  75  of  this 
volume. 


BUSINESS  USES  41 

in  many  instances  the  privilege  is  exercised  unnecessarily, 
simply  because  some  luxury  is  desired  or  because  the  security 
market  seems  low,  or  because  some  other  apparent  opportu- 
nity to  make  money  quickly  seems  to  present  itself.  And, 
even  where  these  considerations  are  not  the  motive,  the  insured 
frequently  uses  this  asset  because  it  is  so  easily  obtained, 
never  considering  at  the  time  the  relation  of  that  asset  to  his 
beneficiary  and  often  overlooking  some  other  available  asset 
which  should  have  been  used  in  preference  to  the  cash  value 
of  his  policy.  Borrowing  under  such  conditions  is  not  con- 
templated in  this  discussion.  What  it  is  intended  to  show  is 
that  the  surrender  or  loan  value  of  a  policy  is  a  real  asset 
which  enhances  the  credit  of  the  business  man  because  it  is 
available  on  demand,  irrespective  of  the  financial  conditions 
which  may  prevail,  and  usually  at  the  fixed  rate  of  5  or  6 
per  cent. 

Bankers  and  other  creditors  always  regard  the  cash  value 
of  a  business  man's  policies  as  an  additional  asset  justifying 
larger  extension  of  credit  on  his  firm's  paper.  But  sup- 
pose the  borrower  must  have  additional  credit  at  a  time  when 
the  condition  of  the  money  market  is  such  as  to  make  it 
highly  inconvenient  or  impossible  for  the  banks  to  meet  his 
requirements.  It  is  at  such  times  that  the  loan  privilege 
contained  in  insurance  contracts  affords  a  convenient  and 
most  excellent  means  of  relief,  as  has  been  amply  testified  to 
by  many  of  the  nation's  leading  business  men.  During  the 
panic  of  1907,  for  example,  when  such  stringency  prevailed 
in  the  credit  market  as  to  make  impossible  the  floating  of 
loans  even  on  the  best  collateral,  millions  of  dollars  were  bor- 
rowed on  life-insurance  policies  and  numerous  business  men, 
firms  and  corporations  used  their  life-insurance  contracts 
as  a  means  of  securing  funds  to  make  up  their  payrolls  or  to 
meet  other  pressing  obligations.  This  service  of  life  insur- 
ance to  the  business  community  and  the  spirit  in  which  it 
should  be  used  is  well  exemplified  by  the  experience  of  one 
of  the  nation's  leading  business  men.  He  writes : 5 

5  JOHNSON,  ALBA  B.,  "  A  Business  Man's  Views  Upon  Life  Insur- 


42  THE  PRINCIPLES  OF  LIFE  INSURANCE 

Never,  except  as  a  last  resource,  should  a  man  use  his  insur- 
ance policies  as  the  basis  for  borrowing.  It  should  be  a  source 
of  joy  and  satisfaction  that  this  sacred  investment  is  kept  clear 
of  encumbrance.  Whatever  advantageous  financial  operations 
may  offer  with  reference  to  other  investments,  sums  set  aside 
for  insurance  should  be  regarded  as  of  a  different  class,  to  be 
maintained  unimpaired.  It  is  a  satisfaction  to  know  that  the 
gradually  increasing  cash  value  offers,  however,  a  resource  al- 
ways available  and  unquestionable.  It  is  a  stout  anchor  to» 
windward  holding  firm  against  any  storm  of  family  or  business; 
misfortune  that  may  arise.  In  the  autumn  of  1907,  there  was- 
a  panic,  during  which  there  was  a  practical  suspension  both 
of  currency  payments  and  of  credits.  Rates  of  interest  ad- 
vanced to  prohibitory  figures,  but  notwithstanding  the  enhanced 
rates,  loans  were  practically  impossible  to  obtain.  Three  or 
four  years  before,  one  of  my  partners  and  I  had  taken  out 
life-insuance  policies  for  considerable  amounts.  These  gave 
the  right  to  borrow  from  the  insurance  company  at  the  fixed 
rate  of  5  per  cent.  We  were,  therefore,  enabled  to  place  this 
credit  at  the  disposal  of  the  partnership  of  which  we  were 
members,  and  about  $120,000  of  cash  was  instantly  available  in 
a  time  of  great  need.  Of  course,  these  loans  were  repaid  to 
the  insurance  company  immediately  upon  the  restoration  of 
normal  conditions.  Such  a  privilege  must  in  many  cases  mean, 
the  avoidance  of  actual  disaster. 

The  Use  of  Life  Insurance  as  a  Means  of  Borrowing- 
Without  Collateral. —  Thus  far  it  has  been  shown  that  life 
insurance  may  be  the  means  of  strengthening  and  safeguard- 
ing the  credit  of  a  business  whose  tangible  collateral  might 
be  adversely  affected  by  the  death  of  those  who  are  the  brains 
and  the  life-blood  of  the  concern.  But  life-insurance  policies 
may  also  be  used  for  effecting  loans  by  persons  who  possess  no 
tangible  security  whatever  but  who  are  trusted  by  the  lend- 
ers because  of  their  well-known  integrity.  The  usefulness 
of  life  insurance  in  this  important  respect  has  been  too  little 
appreciated.  Thousands  upon  thousands  of  young  men  frit- 
ter away  the  best  years  of  their  lives  and  fail  to  take  advan- 

ance."     An  address  delivered  before  the  Philadelphia  Association  of 
Life  Underwriters,  December  4^  1913. 


BUSINESS  USES  43 

tage  of  the  finest  opportunities  simply  because  they  are  labor- 
ing under  the  assumption  that  they  are  handicapped  in  doing 
what  they  would  like  to  do  because  they  do  not  actually  possess 
the  necessary  capital. 

The  serviceability  of  life  insurance  in  helping  such  young 
men  to  realize  their  ambition  may  be  illustrated  by  the  fol- 
lowing example:  A  young  man  desires  to  obtain  a  college 
education,  yet  he  himself  does  not  possess  the  necessary  means: 
nor  can  his  parents,  owing  to  their  moderate  circumstances,, 
assist  him,  much  as  they  would  like.  His  best  interests  re- 
quire that  he  should  take  the  course  of  study  as  soon  as  possible: 
and  pursue  it  consecutively  and  without  interruption,  but  this ; 
he  feels  he  cannot  do.  Assuming  that  this  young  man  is- 
determined  to  get  the  education,  he  will  see  that  one  of  two; 
courses  is  open  to  him.  He  may  first  earn  the  necessary 
money,  but  this  course  is  likely  to  consume  some  of  his  best, 
years,  and  will  defer  the  time  of  graduation  and  his  entrance* 
into  his  chosen  vocation.  Or,  he  may,  as  the  saying  is,  "  earn* 
his  way  through  college,"  but  in  doing  this  he  is  serving  two- 
masters,  to  the  detriment  of  himself.  He  is  in  college  for 
the  express  purpose  of  preparing  himself  for  his  life  work,, 
yet  he  must  give  much  time  and  energy  that  should  be  devoted' 
to  study,  to  the  performance  of  work  in  which  he  has  no  other 
interest  than  the  earning  of  necessary  funds.  Clearly,  it  is; 
to  the  interest  of  this  young  man  to  borrow  money,  if  that  is 
possible,  so  as  to  enable  him  to  give  all  his  time  to  the 
mastery  of  his  studies,  and  upon  their  completion,  promptly 
to  begin  his  vocation  with  a  view  to  repaying  the  loan  as  soon 
as  possible- 

Now,  .as  is  frequently  the  case,  this  young  man  has  some 
relative  or  friend  who  is  interested  in  his  welfare,  and  who 
can  be  induced  to  advance  the  necessary  amount  at  the  cur- 
rent rate  of  interest  and  without  tangible  collateral  if  only 
assurances  can  be  given  that  the  loan  will  be  repaid.  Know- 
ing the  young  man's  reliability,  the  lender  feels  certain  that 
the  loan  with  interest  will  be  repaid  in  due  course  of  time, 
but  he  cannot  afford  to  gamble  with  the  contingency  of 


44         THE  PRINCIPLES  OF  LIFE  INSURANCE 

death,  because  he  knows  that  should  the  borrower  be  removed 
by  an  untimely  death  the  loan  would  never  be  repaid.  This 
uncertain  element  in  the  transaction  may  be  obviated  in  one 
of  two  ways.  Either  the  young  man  may  insure  his  life  for 
an  amount  sufficient  to  cover  the  principal  of  the  loan,  any 
premiums  that  the  creditor  might  have  to  pay,  and  all  antici- 
pated interest  charges,  and  then  assign  the  policy  to  the  cred- 
itor; or,  the  creditor  may,  if  he  so  desires,  take  out  a  policy 
on  the  life  of  the  debtor.  Usually  it  is  best  for  the  debtor  to 
take  out  the  insurance  and  protect  the  creditor  with  an  assign- 
ment. 

Moreover,  if  the  debtor  finds  it  necessary  he  may  arrange 
to  have  the  creditor  pay  the  premiums  and  consider  these 
as  a  part  of  the  loan.  Now  if  the  borrower  completes  his 
course  and  continues  to  live  he  will  repay  the  loan  with 
interest  and  at  that  time  the  assigned  policy  will  revert  to 
him  and  may  then  be  used  for  family  or  business  protection. 
Should  the  borrower  die,  however,  before  he  has  had  time  to 
repay  all  of  the  loan,  the  creditor  will  retain  out  of  the  in- 
surance proceeds  the  amount  still  owing  and  refund  the  bal- 
ance to  the  person  or  persons  designated  as  beneficiaries  by 
the  insured. 

Numerous  other  illustrations  may  be  mentioned  to  show  the 
value  of  life  insurance  as  a  means  of  making  possible  borrow- 
ing without  collateral.  It  may  serve  as  a  means  of  enabling 
a  young  man  to  obtain  the  initial  supply  of  capital  to  start 
in  business.  It  may  enhance  the  value  of  an  indorsement  or 
any  other  obligation  when  the  indorser  or  debtor  is  not  the 
possessor  of  marketable  collateral.  It  may  also  advantage- 
ously be  used  in  that  large  number  of  instances  where  a 
man  already  established  in  business  may  need  more  credit  for 
its  proper  development  but  where  the  banker  feels  that  the 
business,  standing  by  itself,  does  not  warrant  the  making  of  a 
new  loan.  To  the  banker  the  man  at  the  head  of  the  business 
is  a  very  important  asset,  and  he  may  feel  that  while  the 
business  itself  does  not  warrant  another  loan,  the  business 
plus  the  man  who  manages  it  would  justify  the  extension  of 


BUSINESS  USES  45 

further  credit.  Here,  however,  just  as  in  the  previous  illus- 
tration, the  contingency  of  early  death  must  be  provided 
against,  since  in  that  event  the  last  loans  are  apt  to  be  unse- 
cured. In  other  words  a  life-insurance  policy  in  favor  of  the 
creditor  is  a  hedge  against  the  contingency  of  the  loss  of  the 
value  of  the  human  life  upon  which  the  repayment  of  the  loan 
is  primarily  dependent. 

The  Use  of  Life  Insurance  as  a  Means  of  Making  Con- 
tingent Interests  Marketable. —  One  of  the  minor  functions 
of  life  insurance  is  its  use  in  making  contingent  interests 
marketable.  Eeference  is  had  especially  to  the  use  of  so- 
called  contingent  or  survivorship  policies  which  expressly 
provide  that  the  face  of  the  policy  will  only  be  paid  upon  the 
death  of  the  insured  if  some  other  designated  person  is  still 
living  at  the  time,  i.e.  the  policy  is  said  to  insure  one  life 
against  another.  The  function  of  such  contracts  becomes  ap- 
parent when  we  reflect  that  frequently  the  owners  of  estates 
bequeath  the  entire  income  to  the  widow  throughout  her  life 
the  property  itself  to  be  distributed  upon  her  death  to  certain 
heirs  who  may  then  be  living.  Such  heirs,  it  is  clear,  possess 
a  valuable  right  under  the  will,  but  it  is  a  contingent  one  and 
may  be  lost  in  case  of  death  during  the  lifetime  of  the  widow. 
Manifestly,  it  will  be  most  difficult  for  any  such  heirs  to  giver 
this  contingent  interest  a  marketable  value  for  the  purpose 
of  a  sale  or  a  loan  unless  some  means  can  be  found  to  protect 
the  purchaser  or  lender  against  the  loss  of  the  interest  through 
the  death  of  the  heir  before  the  death  of  the  widow.  Such 
protection  is  furnished  most  cheaply  through  a  so-called  con- 
tingent or  survivorship  policy.  Thus  let  us  assume  that 
A—  -  is  entitled  to  property  contingent  upon  surviving 
B ,  who  is  the  life- tenant  of  an  estate.  Save  as  a  specu- 
lation, depending  largely  upon  the  condition  of  B 's 

health,  the  contingent  reversion  has  no  realizable  value.  But 
this  contingent  interest  may  be  Converted  into  a  marketable 
proposition  through  a  life-insurance  policy  payable  only  upon 

A 's  death  during  the  lifetime  of  B .     Such  policies 

may  be  secured  by  the  payment  of  a  single  premium  in  ad- 


46  THE  PRINCIPLES  OF  LIFE  INSURANCE 

vance,  or  may  be  paid  for  by  annual  premiums  continuing 
during  the  joint  duration  of  the  two  lives. 

BIBLIOGRAPHY 

A  very  large  number  of  papers  and  addresses  on  Business 
Life  Insurance  have  been  published  during  recent  years.     The 
following  may  be  mentioned  as  covering  essential  phases  of  the 
subject : 
ANDERSON,  STEWART,  "  Commercial  Life  Insurance,"  in  Howard 

P.  Dunham's  The  Business  of  Life  Insurance,  i,  chap.  23. 
COCHRAN,  GEORGE  I.,  "  Life  Insurance  as  an  Aid  to  Business." 
An  address  delivered  by  George  I.  Cochran  and  published 
in  the  Proceedings  of  the  Seventh  Annual  Meeting  of  the 
Association  of  Life  Insurance  Presidents,  1913. 
YOUNG,  T.  E.,  "  The  Uses  of  Life  Insurance  to  the  Business 
Man,"  in  his  book  on  "  Insurance,"  chap.  10. 


CHAPTER  IV 
CLASSIFICATION  OF  POLICIES 

Despite  the  numerous  forms  of  life-insurance  policies  al- 
ready on  the  market,  each  year  sees  the  various  companies 
announcing  to  the  public  new  contracts  containing  some  spe- 
cial feature.  Ignoring  the  numerous  minor  differences  that 
exist,  life-insurance  contracts  may  be  classified  briefly  under 
the  following  six  leading  groups.  This  chapter  will  merely 
undertake  to  define  and  indicate  the  nature  of  the  contracts 
comprising  each  of  these  groups ;  che  discussion  of  the  special 
uses  and  the  relative  advantages  or  disadvantages  of  the  re- 
spective policies  being  deferred  to  the  next  six  chapters. 

Policies  Classified  According  to  the  Term.—  Under  this 
heading  contracts  may  be  classified  as  "  whole-"  or  "  straight- 
life  policies/'  and  "  term  policies/'  the  first  implying  that  the 
policy  continues  during  the  whole  of  the  insured's  life  and 
that  the  face  value  is  payable  only  at  death,  and  the  second 
referring  to  a  policy  payable  only  if  death  occurs  during  a 
stipulated  period,  such  as  five,  ten,  fifteen,  or  twenty  years. 
A  whole-life  policy  may  be  defined  as  a  "  term  policy  for  the 
whole  of  life/'  while  a  term  policy,  as  understood  in  life-insur- 
ance terminology,  is  one  written  for  a  definite  period  of  years. 
It  should  be  noted,  however,  that  where  the  company  is  a 
mutual  one  the  divided  distributions  on  the  whole-life  policy 
may  be  allowed  to  remain  with  the  company  with  a  view  to 
shortening  the  time  of  maturity  of  the  contract.  In  other 
words,  the  dividend  accumulations,  if  left  with  the  company, 
may  be  used  to  terminate  the  policy  for  its  face  value  at  a 
given  date  although  death  may  not  have  occurred  by  that  time. 

Policies  Classified  According  to  the  Method  of  Paying 
Premiums. —  Life-insurance  premiums  are  customarily  paid 

47 


48         THE  PRINCIPLES  OF  LIFE  INSURANCE 

on  the  "  annual  level  premium  "  plan,  i.e.  the  premium  col- 
lected by  the  company  each  year  remains  the  same  during  the 
whole  of  life  or  during  an  agreed  term  of  years.  As  con- 
trasted with  this  method  there  is  the  "natural  premium" 
plan,  according  to  which  the  insurance  is  granted  in  the  form 
of  renewable  one-year-term  insurance,  the  annual  premium 
increasing  from  year  to  year  in  accordance  with  the  increase 
in  the  cost  of  insurance  brought  about  by  the  increased  risk 
attaching  to  increasing  age.  This  plan  is  rarely  used  to-day 
and,  as  will  be  explained  in  the  chapter  on  the  "  Reserve,"  x 
the  success  of  modern  life  insurance  is  dependent  upon  the 
charging  of  a  uniform  level  premium. 

Annual  premiums  on  any  policy  may  be  discounted  to  their 
present  value,  and  this  discounted  amount  paid  in  advance 
in  one  lump  sum,  commonly  called  the  "  single  premium." 
Mathematically,  the  net  single  premium  (i.e.  the  single  pre- 
mium without  any  additions  for  expenses  and  contingencies) 
is  equivalent,  taking  into  consideration  the  element  of  time 
and  an  assumed  rate  of  interest,  to  the  net  annual  level  pre- 
miums paid  for  the  same  policy.  Annuities  are  commonly 
paid  for  with  a  single  premium  in  advance,  but  life-insurance 
policies  are  rarely  paid  for  by  this  method,  the  policyholder 
rinding  the  small  annual  premium  much  more  convenient,  and 
also  not  wishing  to  risk  the  chance,  in  case  of  early  death,  of 
losing  the  much  larger  sum  paid  to  the  company  under  the 
single  premium  plan.  It  should  also  be  stated  that  companies, 
as  regards  the  great  majority  of  policies  written,  permit  the 
annual  level  premium  to  be  paid  semi-annually  or  quarterly, 
while  in  the  case  of  industrial  insurance  premium  payments 
are  made  weekly.  While  such  frequent  payments  may  prove 
a  convenience  to  the  policyholder,  the  aggregate  premium  paid 
is  somewhat  larger  because  of  the  loss  of  interest  to  the  insur- 
tnce  company  as  well  as  the  greater  collection  expense. 

Various  other  premium-payment  plans  are  in  use  to-day. 
Thus  under  the  terms  of  the  so-called  "  limited-payment  pol- 

i  Chapter  xvi. 


CLASSIFICATION  OF  POLICIES  49 

icy/7  an  annual  level  premium  is  charged  for  a  limited  number 
of  years,  such  as  ten,  fifteen,  or  twenty  years,  and  upon  the 
payment  of  the  last  premium  the  policy  becomes  "  full  paid." 
This  method  of  paying  premiums  may  under  certain  circum- 
stances be  applied  advantageously  to  any  type  of  life-insurance 
contract,  except  very  short  term  policies.  The  premium  under 
this  plan  is,  of  course,  larger  than  the  annual  level  premium 
paid  throughout  the  life  of  the  policy.  Thus  in  the  case  of  a 
limited  payment  whole-life  policy,  the  ten,  fifteen  or  twenty 
premiums  called  for  by  the  contract  represent  a  total  payment 
sufficiently  larger  than  the  aggregate  amount  paid  in  during 
the  same  period  under  the  ordinary  annual  level  premium 
plan,  so  that  at  the  end  of  the  designated  period  the  company 
will  have  accumulated  an  amount  which  will  be  sufficient,  to- 
gether with  compound  interest  earnings  at  an  assumed  rate, 
to  carry  the  policy  to  maturity  without  requiring  any  further 
payments  from  the  policyholder. 

As  contrasted  with  limited-payment  policies,  there  is  the 
so-called  step-rate  plan  which  may  be  either  an  increasing  or 
decreasing  one.  Eenewable  term  insurance  is  the  most  com- 
mon form  of  an  increasing  premium  policy,  the  annual  pre- 
mium being  level  during  each  term,  but  the  rate  for  each 
term  rising  in  accordance  with  the  then  attained  age.  Again, 
temporary  insurance  may  be  combined,  for  example,  with  a 
whole-life  policy,  the  premium  being  low  during  the  first  five 
years  (this  period  being  regarded  as  term  insurance)  and  the 
insured  possessing  the  option,  at  the  expiration  of  the  five- 
year  period,  to  renew  the  policy  as  a  life  policy  and  at  a  higher 
premium.  Many  fraternal  benefit  societies  also  follow  the 
plan  of  issuing  life  benefit  certificates  under  various  forms  of 
the  increasing  step-rate  plan.  The  level  premium,  for  exam- 
ple, may  be  increased  at  five-year  intervals  until  age  60  is 
reached,  when  an  increased  level  premium  is  charged  for  the 
rest  of  life.  This  is  done  to  prevent  the  heavy  withdrawals 
which  would  inevitably  result  if  the  five-year  step-rate  plan 
were  consistently  followed  during  the  older  years  when  the 
high  mortality  would  cause  the  term  rates  to  reach  prohibitive 


50  THE  PRINCIPLES  OF  LIFE  INSURANCE 

figures.  Some  of  the  societies  even  encourage  the  accumula- 
tion of  a  small  sum  per  week  during  the  earlier  years  of  the 
policy  with  a  view  to  building  up  a  reserve  which  can  be  ap- 
plied to  a  reduction  of  the  annual  level  premium  for  the  period 
following  age  60. 

Some  companies  make  use  of  the  decreasing  step-rate  plan, 
although  it  seems  that  this  method  has  not  met  with  much 
popular  favor.  The  plan  most  generally  adopted  employs 
four  steps.  During  the  first  five  years,  for  example,  the  pre- 
mium is  level ;  for  the  next  five  years  the  original  premium  is 
decreased  25  per  cent.,  the  reduced  premium,  however,  being 
again  level  for  that  period  of  years;  for  the  third  five  years 
the  level  premium  is  reduced  to  50  per  cent,  of  the  original 
charge;  for  the  last  five  years  to  25  per  cent;  and  at  the  end 
of  that  period  the  policy  becomes  full-paid.  It  will  be  ob- 
served that  such  a  decreasing  premium  plan  constitutes  a 
limited-payment  insurance,  as  already  explained,  except  that 
the  premium  in  the  ordinary  limited-payment  policy  is  uni- 
formly level  for  the  entire  period  during  which  premiums  are 
paid. 

Policies  Classified  According  to  the  Inclusion  or  Exclu- 
sion of  a  Pure-Endowment  Feature. —  A  pure  endowment  is 
a  contract  which  promises  to  pay  to  the  holder  thereof  a  stated 
sum  of  money  if  he  be  living  at  the  end  of  a  specified  period, 
nothing  being  paid  in  case  of  prior  death.  Term  insurance, 
on  the  contrary,  consists  of  a  promise  to  pay  a  stated  sum  in 
case  of  death  during  the  given  period,  nothing  being  paid  in 
case  of  survival.  The  two  promises  are,  therefore,  exactly 
opposite  in  their  nature.  They  may,  however,  be  combined  in 
the  same  contract,  in  which  case  the  policy  goes  under  the 
name  of  "  endowment  insurance."  Thus  a  $1,000  twenty- 
year  endowment  policy  may  be  regarded  as  a  combination  of 
twenty-year  term  insurance  for  $1,000  and  a  twenty-year  pure 
endowment -for  an  equal  amount.  In  other  words  the  policy 
assures  the  holder  that  he  will  receive  $1,000  whenever  death 
may  occur  during  the  twenty-year  term ;  likewise  that  he  will 
receive  $1,000  in  case  he  outlives  the  said  twenty-year  period. 


CLASSIFICATION  OF  POLICIES  51 

In  either  case  the  policy  holder  receives  $1,000,  the  payment 
at  death  being  provided  for  under  the  term  insurance  feature 
of  the  endowment  contract,  and  the  payment  upon  survival 
being  provided  for  under  the  pure  endowment. 

The  mathematical  premium  for  endowment  insurance  rep- 
resents the  sum  of  the  premiums  for  the  term  insurance  and 
for  the  pure  endowment.  The  premium  paid  at  a  given  age 
will  be  higher  for  short-  than  for  long-term  endowments  be- 
cause the  company  must  collect  a  sufficient  amount  of  money  so 
that  together  with  compound  interest  it  will  have  the  face  value 
of  the  policy  at  the  end  of  the  term.  Such  policies  have  be- 
come very  popular  during  the  past  twenty  years,  and  now  repre- 
sent a  very  considerable  proportion  of  the  total  life  insurance 
written.  They  may  cover  any  stipulated  period,  such  as  ten, 
fifteen,  twenty,  thirty,  and  forty  years.  In  Great  Britain  the 
tendency  has  been  towards  the  selection  of  the  longer  terms, 
while  in  America  the  twenty-year  period  seems  to  have  proved 
the  most  popular,  although  various  companies  are  now  strongly 
urging  the  long-term  period  with  a  view  to  having  the  policy, 
by  making  it  mature  at  such  ages  as  60  or  65,  afford  a  con- 
venient combination  of  life-insurance  protection  with  pro- 
vision for  old  age.  Their  contention  is  that  a  whole-life  policy 
is  an  endowment  policy  maturing  at  age  96,  according  to  the 
American  Experience  table,  and  that  by  the  payment  of  a 
slightly  higher  premium,  or  by  leaving  all  dividend  accumula- 
tions with  the  company,  the  policy  should  be  made  to  mature 
at  a  more  logical  age,  such  as  60  or  65.  Premiums  are  usually 
paid  on  the  level  plan  throughout  the  life  of  the  contract. 
Often,  however,  long-term  endowments  for  periods  like  thirty 
or  thirty-five  years  are  paid  for  on  the  limited-payment  plan, 
the  premiums,  for  example,  being  paid  during  the  first  ten  or 
fifteen  years,  although  the  face  of  the  policy  is  not  pay- 
able until,  say,  twenty  years  after  premium  payments  have 
ceased. 

Many  types  of  endowment  policies  are  issued  in  addition  to 
the  ordinary  form  which  promises  a  stipulated  amount  in  the 
event  of  either  death  or  survival.  Thus  there  may  be  "  double 


52          THE  PRINCIPLES  OF  LIFE  INSURANCE 

endowments/'  in  which  case  the  pure  endowment  equals  twice 
the  sum  of  the  amount  that  will  be  paid  in  the  form  of  term 
insurance  in  case  of  death,  or  "  semi-endowments/'  where  the 
pure  endowment  equals  one-half  the  amount  paid  upon  death. 
Various  special  types  of  so-called  "  child  endowment  policies  " 
are  also  issued.  Sometimes  these  policies  provide  merely  for 
the  return  in  full  of  all  the  premiums  paid  in  the  event  of  the 
child's  death,  the  face  of  the  policy  being  paid  only  upon  the 
child  surviving  a  fixed  age.  Policies  of  this  character  are  not 
life-insurance  contracts  in  the  true  sense,  but  have  for  their 
purpose  the  accumulation  of  a  fund  for  business  or  educational 
purposes  upon  the  child  attaining  a  specified  age.  In  other 
instances  a  smaller  premium  may  be  charged  because  only 
the  payment  of  a  pure  endowment  is  promised,  there  being  no 
return  of  the  premiums  in  the  event  of  the  child's  death  during 
the  specified  term.  Again,  it  may  be  provided  that  upon  the 
death  of  the  purchaser  of  a  child's  endowment  policy,  usually 
the  father  or  some  other  near  relative,  all  premium  payments 
shall  cease,  the  policy  becoming  full-paid  and  the  principal 
becoming  due  when  the  child  reaches  a  specified  age.  It  may 
be  added  that  until  recently  various  companies  also  extended 
the  pure-endowment  feature  to  the  payment  of  dividends  on 
various  types  of  contracts.  This  was  done  under  the  so-called 
"tontine  plan,"  whereby  the  dividends  were  paid  only  at  the 
end  of  a  certain  number  of  years,  such  as  ten,  fifteen,  or  twenty 
years,  provided  the  policyholder  was  living  at  that  time,  these 
dividends,  however,  being  forfeited  in  case  of  death  before  the 
expiration  of  the  indicated  number  of  }7ears. 

Policies  Classified  According  to  the  Method  by  Which 
the  Proceeds  Are  Paid. —  Reference  is  had  under  this  head- 
ing to  the  various  types  of  so-called  installment  policies. 
Instead  of  paying  the  face  of  the  policy  in  one  lump  sum  in 
the  event  of  death  or  maturity,  the  proceeds  are  paid  in  regu- 
lar installments,  either  annually,  semi-annually,  or  monthly, 
over  a  prescribed  period  of  time,  such  as  ten,  fifteen,  or  twenty 
years.  This  installment  feature  may  be  applied  to  the  pay- 
ment of  the  proceeds  of  any  of  the  usual  types  of  policies. 


CLASSIFICATION  OF  POLICIES  53 

Thus  it  may  be  arranged  that  under  a  $10,000  whole-life 
policy  the  principal  of  $10,000  shall  not  be  paid  in  full  upon 
death,  but  the  company's  liability  shall  be  limited  to  the  pay- 
ment of  $1,000  upon  the  happening  of  death  and  $1,000  each 
year  thereafter  until  the  tenth  or  last  installment  has  been 
paid.  In  case  the  company's  liability  should  be  limited  to 
the  payment  of  the  $10,000  in  the  form  of  fifteen  or  twenty 
installments,  each  installment  would  be,  respectively,  $666.66 
and  $500.  Should  the  beneficiary  die  before  all  the  install- 
ments have  been  paid,  provision  is  usually  made  that  the 
unpaid  installments  may  be  continued  for  the  original  amount 
to  the  deceased  beneficiary's  estate  or  to  a  newly  designated 
beneficiary,  or  may  be  commuted  and  paid  in  one  lump  sum. 

If  the  total  installments  aggregate  the  face  value  of  the 
policy,  the  cost  of  the  contract  will  naturally  be  smaller  than 
if  the  face  value  of  the  policy  be  payable  in  full  upon  ma- 
turity of  the  contract.  It  is  apparent  that  by  paying  the 
$10,000  in  ten  installments  the  company  retains  the  use  of 
a  large  part  of  the  policy's  proceeds  for  a  considerable  period, 
viz,  $9,000  for  one  year,  $8,000  for  one  year,  $7,000  for  one 
year,  etc.  Mathematically,  the  company  can  arrange  to  give 
the  interest  earnings  (at  an  assumed  rate)  on  these  balances 
to  the  insured  during  his  lifetime  in  the  form  of  a  reduced 
premium.  Many  companies,  however,  follow  the  plan  of 
charging  the  same  premium  that  would  be  required  on  the 
same  kind  of  policy  when  providing  for  the  payment  of  the 
proceeds  in  one  lump  sum,  and  then  make  allowance  for  inter- 
est earnings  on  the  proceeds  retained  under  the  installment 
plan  by  increasing  the  size  of  the  installments. 

While  the  ordinary  installment  policy,  as  just  described, 
affords  the  advantage  of  giving  the  beneficiary  a  definite  in- 
come for  a  prescribed  number  of  years  and  thus  prevents  the 
possible  loss  or  dissipation  of  the  proceeds  of  the  policy  as 
might  be  the  case  if  the  entire  sum  were  paid  at  once,  it 
should  be  remembered  that  these  installments  are  limited  in 
number,  and  that  upon  the  payment  of  the  last  installment 
the  beneficiary  may  still  be  in  need  of  an  income.  This 


54  THE  PRINCIPLES  OF  LIFE  INSURANCE 

shortcoming  of  the  ordinary  installment  policy  may  be  avoided 
by  arranging  for  the  continuance  of  such  payments  through- 
out the  lifetime  of  the  beneficiary.  Such  an  arrangement 
may  be  effected  under  the  so-called  "  continuous-installment 
policy."  Here  the  company  agrees  to  pay  a  definite  number 
of  installments,  irrespective  of  the  death  or  survival  of  the 
beneficiary,  and  to  this  extent  the  continuous-installment  pol- 
icy includes  the  ordinary  installment  feature.  But  after  the 
entire  face  of  the  policy  has  been  paid  in  installments  the 
company  gives  the  further  very  important  guarantee  that  it 
will  keep  on  paying  these  installments  if  the  beneficiary  be 
still  living  and  will  continue  to  do  so  during  the  lifetime  of 
said  beneficiary. 

The  continuous-installment  feature  lends  itself  to  a  large 
variety  of  applications,  and  almost  any  set  of  circumstances 
requiring  a  guaranteed  income  can  be  met  by  the  contracts 
of  certain  companies.  The  continuous  income  may  be  so 
arranged  as  to  be  paid  annually,  semi-annually,  or  monthly, 
as  desired.  Instead  of  guaranteeing  an  income  throughout 
the  lifetime  of  merely  one  beneficiary,  several  beneficiaries 
may  be  protected.  Thus  one  beneficiary  may  be  assured  an  in- 
come throughout  life,  and  following  his  or  her  death,  another 
designated  beneficiary  may  become  the  recipient  of  the  stipu- 
lated income  either  during  the  whole  of  life  or  for  a  specified 
number  of  years.  Similarly,  the  continuous-installment  plan 
Viay  be  combined  with  the  endowment  principle.  Thus  if  the 
bolder  of  an  endowment  policy  should  outlive  the  endowment 
period  an  annual  income  may  be  promised  to  him  throughout 
life.  Further  arrangement  may  be  made  whereby,  following 
his  death,  an  annual  income  may  be  paid  to  his  wife  or  other 
beneficiary  or  beneficiaries  as  long  as  they  may  live.  Or,  the 
policy  may  be  made  to  contain  a  guarantee  to  the  holder  of, 
say,  twenty  definite  annual  payments  with  a  further  promise 
that  such  installments  will  continue,  following  the  payment 
of  the  twentieth  installment,  during  either  the  lifetime  of  the 
insured  or  of  the  insured  and  another  beneficiary. 

Two  other  types  of  policies  should  be  mentioned  under  our 


CLASSIFICATION  OF  POLICIES  55 

classification  of  policies  according  to  the  method  of  paying 
the  proceeds,,  viz,  so-called  "reversionary  annuities"  and 
"gold"  or  "debenture  bonds."  The  first  type  of  contract, 
said  to  be  the  first  form  of  installment  insurance  written,  pro- 
vides a  life  annuity  to  the  beneficiary  in  case  of  the  insured's 
death  before  the  beneficiary's  death.  If,  however,  the  bene- 
ficiary should  die  first,  the  insurance  contract  is  regarded  as 
having  expired  and  all  premium  payments  are  considered  fully 
earned.  The  debenture  gold  bond  plan,  like  the  installment 
feature,  may  be  applied  to  any  of  the  ordinary  types  of  policies 
written.  According  to  this  plan,  considered  in  connection 
with  a  whole-life  policy,  the  company  retains  the  entire  pro- 
ceeds of  the  policy  upon  the  death  of  the  insured  and  issues  a 
bond  to  the  beneficiary  bearing  an  agreed  annual,  or  semi- 
annual rate  of  interest.  At  the  expiration  of  the  interest-pay- 
ing period  such  as  ten,  fifteen,  or  twenty  years,  the  bond  is 
redeemed.  Usually  the  interest  rate  promised  is  high  as  com- 
pared with  the  rate  of  interest  which  life-insurance  companies 
use  in  the  computation  of  their  rates.  This  high  rate  of  in- 
terest on  the  bond  is  entirely  feasible  owing  to  the  fact  that 
the  company  will  have  safeguarded  itself  in  advance  by  charg- 
ing a  higher  premium  during  the  lifetime  of  the  insured. 
Thus,  according  to  the  rate  book  of  a  certain  company,  the 
annual  gross  rate  for  a  5-per  cent,  twenty-year  gold  bond  on 
the  ordinary  life  plan  is  given  as  $25.74,  while  the  annual  level 
premium  for  an  ordinary  life  policy  at  the  same  age  is  given 
as  $20.14.  In  both  cases  the  mathematical  computation  was 
based  on  the  same  assumed  rate  of  interest,  and  the  larger  pre- 
mium in  the  case  of  the  bond  is  simply  charged  to  assure  the 
accumulation  of  a  sum  of  money  sufficiently  large  to  enable  the 
company  to  guarantee  the  promised  rate  of  interest  on  the 
bond.  It  is  thus  apparent  that  any  rate  of  interest,  no  mat- 
ter how  high,  may  safely  be  promised  if  the  difference  be- 
tween that  rate  and  the  assumed  rate  for  computation  pur- 
poses is  collected  in  the  form  of  higher  premiums. 

Special  Types  of  Contracts. — A  very  large  variety  of  spe- 
cial contracts,  differing  materially  from  those  already  men- 


56         THE  PKINCIPLES  OF  LIFE  INSUEAKCE 

tioned,   might  be   described;  but  special  attention   will  be 
directed  to  the  following  three  main  classes : 

1.  Return-premium   policies. —  Such   policies   differ 
from  the  usual  forms  of  life  insurance  in  that  they  promise 
upon  death  to  pay  not  only  the  face  of  the  policy,  but  in  addi- 
tion thereto  a  sum  equal  to  all  or  to  a  portion  of  the  premiums 
paid.     The    premiums    returned    may    comprise    the    entire 
amount  paid  during  the  existence  of  the  contract,  but  usually 
such  return  is  limited  to  the  premiums  paid  during  a  limited 
period,  such  as  ten,  fifteen,  or  twenty  years.     A  promise  of 
this  kind  should  cause  no  surprise  since  the  policy  merely 
represents  increasing  life  insurance  under  a  level  premium 
plan.     In  other  words,  the  face  value  of  the  policy  increases 
as  the  number  of  premium  payments  increases,  but  this  in- 
creasing amount  of  insurance  must  be  paid  for  by  an  extra 
charge,  i.e.  the  premium  on  a  policy  allowing  a  return  of  all 
or  a  portion  of  the  premiums,  is  higher  than  the  premium  for 
the  same  kind  of  policy  when  not  containing  a  return  pre- 
mium privilege.     It  may  be  added  that  pure-endowment  con- 
tracts sometimes  provide  for  the  return  of  premiums  paid  in 
the  event  of  death  before  the  expiration  of  the  pure-endow- 
ment period. 

2.  Policies  which  involve  more  than  one  life. —  In 
addition  to  the  various  types  of  continuous-installment  poli- 
cies, which  it  will  be  remembered  involve  the  lives  of  the  in- 
sured and  one  or  more  beneficiaries,  there  are  three  other 
types  of  policies  under  this  heading  that  deserve  special  men- 
tion.    One  type  goes  under  the  name  of  "  ordinary  joint-life 
insurance/'     Joint-life  policies  may  be  taken  out  on  two  or 
more  lives,  and  sometimes  prove  advantageous  to  several  busi- 
ness partners  who  may  wish  to  utilize  the  same  for  the  protec- 
tion of  their  partnership  against  the  withdrawal  of  capital  or 
other  financial  embarrassment  occasioned  by  the  death  of  any 
one  of  them.     The  policy  promises  the  payment  of  the  prin- 
cipal in  the  event  of  the  first  death  amongst  the  two  or  more 
persons  covered  by  the  contract.    This  joint-life  principle  may 
be  applied  to  any  of  the  ordinary  forms  of  life  insurance,  such 


CLASSIFICATION  OF  POLICIES  57 

as  whole-life  policies,  limited-payment  policies,  term  insur- 
ance, endowment  insurance,  etc. 

"  Last-survivor  "  and  "  contingent "  or  "  survivorship  "  in- 
surance should  also  be  referred  to  briefly,  although  policies 
of  this  kind  are  used  to  only  a  limited  extent.  The  last- 
survivor  policy  differs  from  the  ordinary  joint-life  policy  in 
that  the  principal  is  payable  in  the  event  of  the  last  death 
instead  of  the  first  death.  Contingent  or  survivorship  poli- 
cies, on  the  other  hand,  "  insure  one  life  against  another " 
and  provide  for  the  payment  of  the  face  value  in  the  event 
of  the  death  of  a  certain  person,  but  only  on  the  condition 
that  some  other  person  designated  in  the  policy  is  still  alive. 
In  his  discussion  of  these  two  forms  of  policies,  Mr.  Henry 
Moir  indicates  their  purpose  in  the  following  words: 

Last-survivor  policies  are  seldom  required,  although  some- 
times when  two  persons  have  an  income  which  will  be  con- 
tinued to  the  survivor,  and  they  desire  to  borrow  money  on 
their  joint  interest,  a  policy  of  this  nature  may  enable  them 
to  effect  their  purpose  on  reasonable  terms.  .  .  .  Contingent  or 
survivorship  policies  will  be  understood  more  •  readily  if  the 
circumstances  under  which  they  are  generally  issued  be  ex- 
plained. It  is  common  in  the  will  of  a  wealthy  man  to  provide 
that  the  entire  income  from  his  property  be  paid  to  his  widow, 
and  that  the  property  be  divided  on  her  death  amongst  certain 
heirs  or  legatees  who  may  then  be  living.  In  such  circum- 
stances it  is  evident  that  the  share  of  the  property  would  be 
lost  by  any  heir  or  legatee  who  might  die  during  the  lifetime 
of  the  widow.  The  cheapest  form  of  protecting  this  share  from 
absolute  loss  is  the  survivorship  assurance,  providing  the  sum 
assured  at  his  death  in  event  of  its  occurring  in  the  lifetime 
of  the  widow.  Assurance  companies  occasionally  grant  loans 
secured  by  contingent  interests  in  estates  to  be  divided  at  some 
future  time,  called  reversions,  and  any  such  loans  should  be 
protected  by  a  survivorship  policy.2 

3.  Policies    containing    total    disability   features. — 
Since  a  separate  chapter  is  devoted  to  a  discussion  of  total 

2  MOIR,  HENRY,  Life  Assurance  Primer,  1907,  29,  30. 


58  THE  PRINCIPLES  OF  LIFE  INSURANCE 

disability  benefits  3  in  life  insurance,  it  will  suffice  to  indicate 
here  merely  the  nature  of  the  special  benefits  offered.  With- 
out special  provision  a  life-insurance  policy  may  not  fully 
protect  where  the  holder  becomes  totally  disabled  and  is  not 
in  a  position  to  keep  his  insurance  alive  by  further  premium 
payments.  Moreover,  even  granting  that  the  policy  can  be 
maintained,  no  part  of  the  face  value  can  be  realized  under  the 
contract  until  death  actually  occurs,  although  such  payments 
may  be  sadly  needed  at  the  time.  Considerations  like  these 
have  induced  a  very  large  number  of  American  companies  to 
assist  the  policyholder  in  various  ways  in  the  event  of  total 
disability.  Such  assistance  has  usually  taken  one  or  more  of 
the  following  forms  in  the  event  of  total  disability :  ( 1 )  the 
premiums  will  cease  and  the  policy  will  be  considered  fully 
paid  during  the  time  of  disability;  (2)  the  policyholder  may 
select  either  this  option  or  may  choose  to  have  the  value  of  his 
policy  converted  into  an  annuity,  the  first  payment  to  begin  at 
once;  and  (3)  the  policy  either  matures  for  a  stated  sum  or 
becomes  payable  in  ten  or  twenty  annual  installments,  such 
payment  stopping  whenever  the  disability  ceases. 

Classification  of  Annuities. — The  ordinary  annuity  con- 
tract is  an  agreement  whereby  the  company  promises,  in  re- 
turn for  a  cash  payment  made  in  advance,  to  pay  the  annuitant 
while  living  an  agreed  amount  annually,  semi-annually,  or 
quarterly,  such  payments  to  cease  whenever  death  occurs. 
The  purchase  of  an  annuity  therefore  represents  the  purchase 
of  a  fixed  income,  and  the  general  purpose  of  the  contract  is 
seen  to  be  the  reverse  of  that  accomplished  under  life  insur- 
ance. 

As  was  the  case  with  life-insurance  policies,  annuities  may 
be  of  various  kinds.  The  annuity  may  be  one  for  the 
whole  of  life  (a  life  annuity)  or  merely  for  a  stipulated  term 
(a  term  annuity).  Sometimes  it  is  provided  that  a  stated 
minimum  number  of  annuity  payments  shall  be  made  under 
any  circumstances,  as,  for  example,  that  at  least  ten  annual 

'Chapter  xxii  on  Disability  Insurance. 


CLASSIFICATION  OF  POLICIES  59 

payments  are  guaranteed  although  the  annuitant  may  have 
died  before  the  expiration  of  that  time.  So-called  "  deferred 
annuities  "  may  also  be  granted  for  the  purpose  of  enabling 
the  purchaser  to  provide  an  income  for  himself  at  some  future 
time,  and  the  purchase  price  of  such  an  annuity  may  take  the 
form  of  a  single  premium  at  the  time  of  purchase,  a  level 
premium  during -the  entire  time  between  the  date  of  purchase 
and  the  commencement  of  the  annuity,  or  the  payment  of  a 
limited  number  of  premiums  under  the  limited  premium  pay- 
ment plan.  Under  the  >  ordinary  annuity,  the  first  annuity  is 
usually  payable  three,  six,  or  twelve  months  following  the 
date  of  purchase,  whereas  under  the  deferred  annuity  the  pay- 
ments do  not  begin  until  the  purchaser  reaches  a  certain  age, 
such  as  twenty  or  thirty  years  following  the  age  at  purchase. 
Should  death  occur  during  this  twenty-  or  thirty-year  period, 
no  refund  of  the  premiums  or  purchase  price  is  ordinarily 
made;  although  it  is  entirely  feasible  under  ths  deferred  an- 
nuity plan  to  provide  that  in  case  of  death  before  the  annuity 
payments  begin,  the  premiums  which  may  have  been  paid  shall 
be  refunded  to  the  heirs  of  the  purchaser.  It  should  also  be 
stated  that  two  persons,  such  as  husband  and  wife,  or  two 
sisters,  may  purchase  an  annuity  payable  to  them  jointly  while 
both  live  and  also  continuing  during  the  lifetime  of  the  sur- 
vivor. As  has  been  well  stated :  "By  this  means  an  income 
is  provided  so  long  as  the  survivor  of  the  two  can  possibly 
require  it.  The  same  principle  may,  of  course,  be  extended 
to  three  or  more  lives,  but  the  circumstances  are  rare  when 
such  annuities  are  desirable,  while  for  two  lives  it  is  a  common 
form  of  contract."  4 

Combination  of  Various  Types  of  Policies.— A  large 
number  of  the  special  contracts  referred  to  in  the  preceding 
classification  represent  in  the  aggregate  only  a  limited  per- 
centage of  the  total  insurance  written.  Probably  three- 
fourths  of  the  total  life  insurance  in  America,  it  has  been 
estimated,  consists  of  three  forms  of  policies,  viz,  whole-life 

4MoiB,  HENRY,  Life  Assurance  Primer,  1907,  32. 


60          THE  PRINCIPLES  OF  LIFE  INSURANCE 

policies  on  the  continuous  premium  plan,  twenty-payment 
whole-life  policies,  and  twenty-year  endowment  insurance. 
The  remaining  one-fourth  of  the  outstanding  insurance  rep- 
resents a  vast  variety  of  policies,  some  differing  from  others 
only  in  minor  particulars.  In  this  respect  it  should  be  noted 
that  many  of  the  foregoing  policy  features  easily  lend  them- 
selves to  the  effecting  of  an  almost  endless  number  of  combi- 
nations. Thus  there  may  be  issued  a  limited-payment  whole- 
life  continuous-installment  policy,  or  a  limited-payment  en- 
dowment policy  with  the  proceeds  payable  in  ten  or  more 
installments.  As  already  indicated,  all  the  various  methods 
of  paying  the  premium,  or  of  distributing  the  principal  of 
the  contract,  may  be  applied  to  any  of  the  ordinary  types  of 
policies  written. 

The  Several  Types  of  Policies  Equivalent  in  Net  Cost.— 
While  policies  differ  greatly  in  form,  it  is  important  to  note 
that  the  net  premium  (the  premium  before  any  addition  is 
made  for  expenses  or  contingencies)  for  all,  as  will  be  shown 
later,  is  computed  on  the  basis  of  the  same  assumptions. 
Thus  a  company  in  computing  the  net  premiums  for  all  its 
types  of  policies  may  use  the  same  mortality  table,  usually 
the  American  Experience  table,  and  the  same  assumed  rate 
of  interest,  usually  3  or  3%  per  cent.  If  this  is  done,  it  fol- 
lows that  all  the  policies  issued  by  a  given  company  are 
equivalent  to  each  other  from  the  standpoint  of  dollars  and 
cents. 

.  Some  Policies  Better  Adapted  than  Others  to  Meet  the 
Special  Needs  of  the  Insured. —  Although  the  policies  issued 
by  a  given  company  are  usually  equivalent  to  one  another  in 
net  cost,  it  is  highly  important  to  remember  that  one  form  of 
policy  may  be  much  better  suited  to  the  needs  of  the  policy- 
holder  than  another.  Much  has  been  written  lately  concerning 
the  "  fitting  of  the  policy  to  the  client/'  by  which  is  meant  that 
the  various  kinds  of  policies  have  certain  advantages  or  disad- 
vantages, depending  upon  the  circumstances  surrounding  the 
applicant  and  the  particular  purpose  that  he  wishes  to  realize 
by  the  taking  out  of  .life  insurance.  It  is  therefore  highly  im- 


CLASSIFICATION  OF  POLICIES  Gl 

portant  for  the  salesman,  after  ascertaining  the  prospective  ap- 
plicant's financial  ability  to  pay  premiums  and  the  object 
which  it  is  desired  to  accomplish  through  insurance,  to  recom- 
mend impartially  that  contract  which  will  best  serve  his  client. 
The  matter  may  be  illustrated  by  the  following  example :  A 
merchant  may  display  a  large  variety  of  suits  of  clothes  all 
valued  at  the  same  price.  But,  despite  their  common  value, 
these  suits  may  differ  in  color,  style,  and  material.  One  suit 
may  be  totally  unfit  for  the  use  of  a  prospective  buyer,  although 
inherently  worth  just  as  much  as  another  suit  which  may  be 
selected  by  him  as  meeting  his  requirements.  In  life  insur- 
ance, likewise,  the  many  policies  on  the  market  may  from  a 
mathematical  standpoint  be  of  equal  value.  But  in  selecting 
a  contract  the  prospective  buyer  should  be  careful  to  see,  and 
in  such  selection  it  is  the  professional  duty  of  the  agent  to 
render  impartial  advice,  that  the  character  of  the  policy  is 
such  as  to  give  him  what  the  family  or  business  circumstances 
surrounding  his  life  require. 


CHAPTER  V 
TERM  INSURANCE 

A  term  policy  in  life  insurance  may  be  defined  as  a  contract 
which  furnishes  life-insurance  protection  for  a  limited  num- 
ber of  years,  the  face  value  of  the  policy  being  payable  only  if 
death  occurs  during  the  stipulated  term,  and  nothing  being 
paid  in  case  of  survival.  Sometimes  such  policies  are  issued 
for  business  purposes  for  a  period  as  short  as  one  year,  and  at 
various  times  such  policies  have  also  been  issued  upon  the 
"yearly  renewable  term  plan,"  according  to  which  the  in- 
sured could  exercise  the  option  of  renewing  the  policy  for 
successive  one-year  periods,  each  year's  premium  being  re- 
garded as  the  cost  of  that  year's  protection,  and  the  premium 
thus  increasing  as  the  policyholder's  age  advanced.  Whilf 
this  plan,  also  commonly  known  as  " natural-premium  insur- 
ance," is  theoretically  sound,  it  has  proved  impracticable  in 
actual  practice,  because  it  is  apparent  that  under  this  plan 
the  premium  would  ultimately  become  prohibitive. 

Owing  chiefly  to  the  aforementioned  faet,  the  issuance 
of  very  short  term  policies  is  limited  at  present  to  cases  involv- 
ing business  and  financial  transactions.  In  nearly  all  in- 
stances term  policies  are  written  by  American  companies  for 
periods  of  five,  ten,  fifteen,  or  twenty  years,  although  other 
periods  are  sometimes  used.  Such  policies  may  insure  for 
the  agreed  term  of  years  only,  or  may  be  renewable  for  suc- 
cessive term  periods  at  the  will  of  the  insured  and  without 
medical  examination.  Various  restrictions  are  also  imposed 
by  many  companies  in  the  issuance  of  term  contracts,  such  as 
limiting  the  size  of  the  policy  to  a  certain  amount  or  the 
length  of  the  term  so  as  not  to  carry  the  insurance  period 
beyond  a  certain  stipulated  age.  Term  insurance  may,  there- 
fore, be  regarded  as  temporary  insurance,  and,  in  principle, 


TERM  INSURANCE  63 

more  nearly  compares  with  a  property  insurance  policy  than 
any  of  the  other  life  contracts  in  use.  If  a  building,  valued 
at  $10,000,  is  insured  for  that  amount  under  a  five-year  term 
policy,  the  company  will  pay  this  insurance,  in  case  of  the 
destruction  of  the  building  during  the  term;  but  if  at  the 
end  of  the  specified  five-year  period  the  owner  neglects  to 
reinsure  the  building  by  renewing  the  policy  and  a  fire 
thereafter  ensues,  the  company  is  absolved  from  all  liability 
in  view  of  the  expiration  of  the  contract.  Similarly,  if  a 
person  insures  his  life  for  $10,000  under  a  five-year  term 
policy,  either  keeping  the  policy  in  force  by  paying  a  single 
premium  in  advance  or  by  paying,  as  is  nearly  always  the 
case,  annual  premiums  from  year  to  year,  the  company  will 
pay  $10,000  in  case  of  the  insured' s  death  at  any  time  before 
the  expiration  of  the  five  years,  nothing,  however,  being  paid 
in  case  death  occurs  after  the  expiration  of  the  contract 
period,  the  term  life  policy,  like  the  fire  policy,  having  ex- 
pired at  that  time. 

Advantages  of  Term  Insurance. — Term  policies  are  es- 
pecially designed  to  afford  protection  against  contingencies 
which  either  require  only  the  taking  out  of  temporary  insur- 
ance or  call  for  the  largest  amount  of  insurance  protection 
for  the  time"  being  at  the  lowest  possible  cost.  The  advan- 
tages of  this  type  of  contract  may  be  enumerated  briefly  as 
follows : 

1.  Term  contracts  are  often  desired  by  those  who  need  a 
large  amount  of  family  protection  at  a  time  when  the  income 
is  so  small  as  to  make  impossible  the  payment  of  the  pre- 
mium for  an  equal  amount  of  protection  under  other  types  of 
policies.  This  is  especially  the  case  where  family  responsi- 
bilities have  been  assumed  by  young  professional  or  business 
men  who  are  just  starting  their  careers  and  who,  appreciating 
the  necessity  of  adequately  protecting  their  families  against 
the  contingency  of  early  death,  feel  that  they  need  heavy 
insurance  protection  at  small  cost  pending  permanent  estab- 
lishment in  their  profession  or  business.  Persons  so  situated 
may  feel  inclined  to  subordinate  the  investment  feature  ID 


64         THE  PRINCIPLES  OF  LIFE  INSURANCE 

life  insurance  to  its  protective  function.  Wanting  all  the 
protection  possible  during  early  years,  they  may  feel  that  they 
can  more  advantageously  use  all  available  savings  in  their 
profession  or  business.  Or,  looking  forward  to  a  larger  in- 
come later  in  life,  they  may  reason  that  they  can  then  advan- 
tageously replace  or  supplement  this  type  of  contract  with 
policies  of  other  kinds  which  have  permanent  protection  as 
their  primary  purpose. 

The  extent  to  which  large  protection  is  granted  by  term 
policies  for  a  small  outlay  at  a  time  when  such  increased  pro- 
tection is  absolutely  needed  at  small  cost,  may  be  exemplified 
by  the  following  rates  charged  by  a  certain  company  selected 
for  purposes  of  illustration.  The  annual  premium  charged 
by  this  company  for  a  $1,000  whole-life  policy  at  age  25  (the 
policy  in  this  instance  being  paid  whenever  death  may  occur) 
is  $19,  at  age  35,  $25.45,  and  at  "age  45,'  $36.50.  But  the 
risk  of  death  during  a  limited  term  of  years  is  less  than  that 
under  a  whole-life  policy  where  the  risk  converges  into  cer- 
tainty. Because  of  this  fact  term  policies  for  five,  ten,  fifteen, 
or  twenty  years  offer  the  advantage  of  a  much  lower  annual 
premium.  Thus  in  the  case  of  the  company  referred  to  a  five- 
year  term  policy  for  $1,000  at  age  25  requires  a  gross  premium 
payment  of  $11.09,  and  the  premiums  charged  for  successive 
renewals  of  this  five-year  contract  are :  at  age  30,  $11.65,  at  age 
35,  $12.50,  and  at  age  60,  $42.21.  In  the  case  of  a  ten-year 
term  policy  at  age  25  this  company  charges  $11.34,  while  the 
renewal  premiums  at  ages  35,  45,  55,  and  60  are,  respectively, 
$13.10,  $18.27,  $34.54,  and  $51.20.  The  same  principle  ap- 
plies to  term  policies  for  fifteen,  twenty,  or  any  other  number 
of  years.  If  such  policies  are  renewable  at  the  option  of  the 
insured  without  medical  examination,  the  policyholder  may 
feel  that  by  a  number  of  renewals  he  may  enjoy  a  large  pror 
tection  for  a  considerable  number  of  years  at  a  low  cost,  and 
discontinue  such  renewals  when  the  protection  is  no  longer 
needed,  or  when  the  renewal  rate  becomes  too  burdensome.  It 
should  be  noted  in  this  respect  that,  whereas  the  rate  for  a 
ten-year  term  policy  at  age  25  is  only  $11,34,  as  contrasted 


TEEM  INSUKANCE  65 

with  $19  for  the  whole-life  policy  at  the  same  age,  the  latter 
rate  remains  the  same  throughout  life,  while  the  successive 
renewal  rates  for  the  term  policy  increase  with  advancing  age 
until  they  become  practically  prohibitive,  the  rate  charged 
by  this  insurance  company  being  $34.54  at  age  55,  and  $51.20 
at  age  60. 

2.  Term  insurance   may  also   enable  young  men   to   ac- 
knowledge   their    debt    to    parents    or   relatives    of    modest 
means  who  have  given  them  their  education  or  who  have 
started  them  in  business.     Under  such  circumstances  every 
young  man  owes  this  debt  to  parents  and  should,  as  soon  as 
he  is  able  to  pay  the  premium,  acknowledge  it  by  carrying 
insurance  for  their  benefit  so  that  their  investment  in  him 
will  be  protected  against  the  contingency  of  an  untimely 
death.     In  the  same  way  a  term  contract  may  enable  one  to 
provide  adequately  during  the  early  years  of  one's  profes- 
sional or  business  career  for  a  dependent  mother,  sister,  or 
other  relative.     Where  the  age  of  the  parent  is  advanced  the 
term  of  the  contract  may  be  so  arranged  as  to  afford  protec- 
tion during  the  probable  lifetime  of  the  beneficiary.     But 
where  the  beneficiary  is  comparatively  young,  the  purpose  of 
the  term  contract  may  be  regarded  as  furnishing  a  large  pro- 
tection at  small  cost,  the  insured  looking  forward  to  a  large 
income  in  later  years  which  will  then  enable  him  the  more 
readily  to  make  the  protection  permanent  by  other  types  of 
contracts.     Again,  the  insured  may  desire  additional  protec- 
tion while  his  children  are  young  and  his  own  estate  is  small 
so  that  in  case  of  early  death  there  will  be  an  adequate  fund 
for  educational  and  maintenance  purposes  until  the  children 
become  self-supporting. 

3.  Such  contracts  are  also  well  adapted  in  many  instances 
to  furnish  protection  against  some  temporary  business  hazard. 
Many  such  contingencies  may  arise,  but  only  a  few  need  be 
mentioned  to  illustrate  the  usefulness  of  term  insurance  in 
this  connection.     A  business  firm  may  wish  to  protect  itself 
for  a  definite  number  of  years  against  the  loss  through  early 
death  of  the  highly  valued  services  of  an  employee  or  of  an 


66  THE  PRINCIPLES  OF  LIFE  INSURANCE 

official  who  is  regarded  as  essential  to  the  continued  success  of 
the  business  enterprise.  Or  the  firm  may  have  engaged  the 
services  of  an  expert  in  an  undertaking  which  it  will  require 
a  certain  number  of  years  to  complete,  and  as  the  work  pro- 
gresses may  be  obliged  to  make  a  considerable  outlay  of  capi- 
tal which  might  be  lost  or  seriously  impaired  by  the  death  of 
said  expert  before  the  completion  of  the  work.  Under  such 
circumstances  the  firm  might  find  a  term  policy,  especially 
in  view  of  its  low  cost,  highly  attractive  as  a  means  of  pro- 
tecting itself  against  loss  during  the  period  required  for  the 
completion  of  the  work.  The  sum  secured  under  the  policy 
in  case  of  death  would  indemnify  the  firm  for  any  loss  in- 
curred by  way  of  impairment  of  the  capital,  or  by  delay  in 
completing  the  work,  assuming  that  another  expert  might  be 
found  to  continue  the  project.  In  many  business  undertak- 
ings it  may  be  found  desirable  to  protect  the  business  during 
the  first  five  or  ten  years  —  usually  the  crucial  and  experimen- 
tal stage  —  when  its  promoters  are  confronted  with  the  task, 
frequently  involving  great  risk,  of  establishing  it  on  a  firm 
foundation  as  regards  clientele  and  credit.  These  are  a  few 
instances  to  illustrate  how  a  firm  or  corporation  may  cover 
any  temporary  extra  hazard,  when  the  low  cost  of  insurance 
is  of  chief  importance. 

In  the  same  way  an  individual  may,  in  many  instances,  use 
term  insurance  advantageously  to  enhance  his  opportunities 
or  to  make  his  financial  position  more  secure.  A  young  man 
may,  for  example,  complete  his  college  course  or  may  start  in 
business  on  borrowed  capital  which  has  been  secured  by  pro- 
tecting the  lender  against  the  possible  loss  occasioned  by  early 
death  which  would  prevent  repayment  of  the  sum  borrowed. 
Sometimes  a  person  may  have  definite  assurance  of  a  certain 
sum  of  money  in  the  future,  such  as  an  inheritance,  pension, 
or  death  benefit,  but  is  obliged  during  the  interval  to  borrow 
money  or  to  obtain  insurance  protection  against  death  before 
the  stipulated  time  arrives.  In  such  cases  term  insurance 
may  be  used  to  great  advantage.  The  lender  will  be  doubly 
protected,  since  the  loan  will  be  paid  out  of  the  inheritance  in 


TERM  INSURANCE  67 

case  of  survival  and  out  of  the  insurance  proceeds  in  case  of 
death.  On  the  other  hand,  the  need  for-  insurance  protection 
may  expire  when  the  policyholder  is  assured  protection  under 
the  terms  of  the  pension  or  insurance  fund  established  by  the 
firm  or  institution  with  which  he  is  connected,  the  term  policy 
in  the  interval  of  waiting  having  served  its  purpose  as  tempo- 
rary protection.  Again,  money  may  have  been  borrowed  on 
a  mortgage  on  real  estate,  the  mortgage  running  for  a  defi- 
nite number  of  years  and  the  mortgagor  expecting  to  pay  off 
the  mortgage  out  of  income  during  that  period.  While  the 
mortgagee  may  feel  entirely  competent  to  accomplish  the  pay- 
ment of  the  mortgage  out  of  savings  from  his  income,  it  is 
highly  important  to  remember,  as  already  stated,  that  it  takes 
time  to  save,  and  that  a  resolution  to  save  should  be  hedged 
with  an  insurance  policy  so  that  if  the  saving  period  is  cut 
short  by  an  untimely  death  the  proceeds  of  the  policy  may 
liquidate  the  balance  of  the  indebtedness.  A  $5,000  mort- 
gage, which  it  is  expected  to  pay  in  ten  years,  can,  therefore, 
be  advantageously  hedged  with  a  $5,000  ten-year  term  policy. 
In  case  of  survival  and  the  payment  of  the  mortgage,  the 
policy  may  no  longer  be  needed  and  may  therefore  not  be  re- 
newed. In  case  of  early  death  the  unpaid  portion  of  thp 
mortgage  can  be  paid  out  of  the  insurance  proceeds,  the  bal- 
ance of  the  insurance  money,  if  any,  being  payable  to  the 
insured^  designated  beneficiary.  In  fact,  any  plan  for  the 
accumulation  of  a  fund  through  saving,  no  matter  what  the 
method  adopted,  should,  as  already  stated,  be  protected  by  an 
insurance  policy. 

Disadvantages  of  Term  Insurance. —  While  the  foregoing 
illustrations  serve  to  indicate  the  useful  purposes  that  may 
often  be  derived  from  term  insurance,  it  is  important  to  note 
that  this  type  of  contract  presents  various  dangers  that  are 
frequently  overlooked  and  that  should  always  be  borne  in  mind 
by  the  person  contemplating  the  taking  out  of  such  a  policy. 
Although  the  absolute  cost  of  term  contracts  is  very  low  in 
the  younger  years  the  sole  purpose  of  such  policies  is  to  fur- 
nish temporary  protection.  The  entire  premium  represents 


68         THE  PRINCIPLES  OF  LIFE  INSURANCE 

payment  for  this  protection  and  nothing  is  paid  to  the  in- 
sured in  case  of  survival  at  the  expiration  of  the  policy.  It 
is  a  common  assertion  that  the  chief  objection  to  this  form  of 
insurance  is  that  the  insured  is  apt  to  feel  dissatisfied  at  the 
expiration  of  the  contract,  and  that  it  is  most  difficult  to 
make  the  average  holder  of  such  a  policy,  after  he  has  paid 
ten  or  twenty  premiums,  appreciate  the  fact  that  he  has  al- 
ready received  full  value  in  the  form  of  protection  for  the 
premiums  paid  and  is  therefore  not  entitled  to  any  refund. 

While  the  insured  may  feel  that  he  will  be  in  a  financial 
position  later  to  make  the  carrying  of  insurance  unnecessary, 
or  to  replace  his  term  insurance  with  policies  at  a  greater 
cost  but  which  afford  permanent  protection,  there  is  nearly 
always  the  danger  that  he  may  have  miscalculated  the  future 
or  may  neglect  to  carry  out  his  original  ideas.  Hence,  if  the 
ordinary  term  policy  is  not  supplemented  with  other  forms 
of  insurance,  such  as  whole-life  or  very  long  term  insurance, 
there  may  come  a  day  when  the  policyholder,  upon  the  ex- 
piration of  the  term  contract,  will  be  without  insurance  at 
the  very  time  when  he  may  need  it  most.  Assuming  that  he 
will  be  able  to  obtain  other  insurance  at  the  time  by  passing  the 
required  medical  examination,  his  advanced  age  will  have 
greatly  increased  the  premium,  and  possibly  at  that  time,  his 
early  expectation  of  a  larger  income  not  having  been  realized, 
such  increased  cost  may  prove  exceedingly  burdensome.  More- 
over, other  types  of  policies  generally  commend  themselves  in 
preference  to  term  contracts  in  that  they  inculcate  in  the 
policyholder  to  a  much  greater  extent  a  compulsory  spirit  of 
thrift  and  cause  the  great  majority  to  have  to  their  credit  a 
large  sum,  accumulated  from  small  payments  promptly  in- 
vested, which  otherwise  they  would  not  have  accumulated  or 
would  have  lost  or  wasted.  Term  insurance,  as  already  stated, 
represents  cost  for  protection  only,  and  the  smallness  of  the 
premium  should  prove  an  attraction  only  where  large  pro- 
tection is  absolutely  needed  and  where  the  available  fund  for 
premium  payments  makes  a  more  permanent  form  of  pro- 
tection impossible. 


TERM  INSURANCE  69 

Renewable  and  Convertible  Features  in  Term  Policies. 

—  Exclusive  of  the  term  covered,  term  policies  are  of  two 
main  kinds:  (1)  those  which  grant  insurance  only  for  the 
specified  term  and  are  renewable  only  upon  a  satisfactory 
medical  examination;  and  (2)  the  renewable-term  policy,  the 
conditions  of  which  give  the  holder  the  option,  at  the  expira- 
tion of  the  first-term  period  or  at  the  end  of  any  subsequent 
term  period,  to  renew  the  policy  without  a  medical  examina- 
tion and  irrespective  of  the  insured's  health  at  the  time  of 
renewal.  The  renewal  of  the  policy,  in  other  words,  can  be 
effected  by  the  insured  by  paying  the  premium  for  the  age 
then  attained.  Usually,  however,  the  companies  limit  the 
age  (generally  55  or  60  years)  at  which  such  renewal  term 
policies  may  be  issued,  and  in  some  instances  the  number  of  re- 
newals permitted  is  limited.  Where  the  term  policy  contains 
no  renewal  privilege  the  insured  may  be  placed  at  the  disad- 
vantage at  the  end  of  the  term,  of  being  without  insurance 
and  of  not  being  in  a  position,  because  of  poor  physical  con- 
dition, to-  secure  a  renewal  of  the  contract  or  to  obtain  any 
other  form  of  life-insurance  protection.  In  many  instances, 
also,  the  particular  contingency  which  the  term  policy  was 
designed  to  cover,  may  still  exist  at  the  expiration  of  the 
term,  thus  making  highly  desirable  the  privilege  of  renewing 
the  contract  for  one  or  more  terms  at  the  will  of  the  insured 
and  without  the  possibility  of  denial  on  the  part  of  the  com- 
pany. 

Nearly  all  term  policies  also  contain  the  so-called  con- 
vertible feature,  i.e.  the  privilege  on  the  part  of  the  insured 
of  converting  the  policy  into  another  type  of  contract  upon  a 
proper  adjustment  being  made  in  the  premium  charge.  Some 
companies  extend  this  conversion  right  throughout  the  term 
period,  but  the  great  majority  grant  the  right  only  for  a  lim- 
ited number  of  years,  such  as  the  first  four,  five,  or  seven 
years  of  the  term.  Conversion  is  usually  allowed  into  whole- 
life,  limited-payment,  or  endowment  insurance.  The  ex- 
change is  usually  allowed  on  any  anniversary  of  the  policy 
luring  the  period  when  conversion  is  permitted,  and  may  be 


70  THE  PRINCIPLES  OF  LIFE  INSURANCE 

effected  in  one  of  two  ways.  The  new  policy  may  bear  the 
date  of  the  surrender  of  the  original  policy  and  the  premium 
thereon  be  that  required  for  such  new  policy  at  the  attained 
age  of  the  insured.  Or,  the  new  policy  may  be  considered  as 
bearing  the  date  of  the  original  policy,  in  which  case  the 
insured  is  usually  required  to  pay  to  the  company  the  differ- 
ence between  the  premiums  which  would  have  been  paid  on 
the  new  policy  if  it  had  been  issued  at  the  same  time  as  the 
original  policy,  and  the  premiums  paid  thereunder  for  the 
same  amount  of  insurance,  with  interest  on  such  difference  at 
a  certain  stipulated  annual  rate.1 

The  advantages  of  the  conversion  privilege  become  apparent 
if  we  consider  the  disadvantages  usually  attaching  to  term  in- 
surance. At  the  time  of  taking  out  the  policy  the  insured 
may  not  have  definitely  selected  the  type  of  policy  best  adapted 
for  his  needs.  Following  the  issuance  of  the  term  policy  his 
circumstances  may  soon  become  such  as  to  enable  him  to 
take  out  adequate  permanent  insurance.  Or  he  may  desire  to 
utilize  insurance  as  a  means  of  accumulating  an  estate  rather 
than  to  use  it  entirely  for  protection  against  death.  As  soon, 
therefore,  as  he  concludes  that  term  insurance  does  not  meet 
his  present  and  future  needs  he  may  carry  out  his  conclusions 
by  exchanging  his  term  contract  for  one  on  the  whole-life  or 
endowment  plan  in  either  of  the  two  ways  already  suggested. 
Moreover,  another  great  value  of  the  conversion  privilege  also 
becomes  apparent  (where  the  policy  does  not  contain  a  re- 
newable privilege)  when  it  is  remembered  that  a  consid- 
erable percentage  of  the  insured  lives  become  physically  im- 
paired to  such  an  extent  during  even  the  first  five  or  seven 
years  following  the  issuance  of  the  contract,  as  to  make  im- 
possible the  securing  of  any  other  plan  of  life  insurance  in  a 
reliable  company.  Under  such  circumstances  a  non-renewable 
term  policy  may,  because  of  its  expiration  before  death,  fail 

1  According  to  another  method  the  "  exchange  may  be  made  as  of 
the  age  and  date  of  issue  of  the  original  policy,  regardless  of  the 
attained  age  of  the  insured,  upon  payment  of  the  difference  between 
the  reserves  upon  the  respective  policies." 


TERM  INSURANCE  71 

utterly  to  protect  the  insured.  If,  however,  the  policy  con- 
tains the  conversion  privilege,  and  if  the  time  limit  for  mak- 
ing an  exchange  of  the  policy  for  a  whole-life  policy  has  not 
yet  expired,  the  insured  will  certainly  want  to  take  advantage 
of  this  privilege  and  thus  protect  himself  against  the  possi- 
bility of  his  insurance  expiring  before  death  occurs. 


CHAPTER  VI 
ORDINARY  LIFE  INSURANCE 

Ordinary  whole-life  policies  provide  for  the  payment  of  the 
face  value  only  upon  the  death  of  the  insured.  Maturing 
only  upon  death,  such  policies  are  taken  out  primarily  for  the 
benefit  of  others,  and,  therefore,  represent  pure  life-insurance 
protection  which  the  insured  has  unselfishly  provided  for 
those  dependent  upon  him.  During  the  earlier  years  of  the 
insured^  life  this  type  of  insurance  in  the  great  majority  of 
cases  affords  protection  at  moderate  cost  for  wife  and  chil- 
dren or  other  dependents.  In  the  later  years  of  life  when  it 
may  be  felt  that  such  protection  is  no  longer  necessary,  be- 
cause the  children  have  become  financially  independent,  the 
insurance  affords  a  convenient  means  of  leaving  legacies  and 
bequests.  As  explained  in  a  previous  chapter,  the  premiums 
on  this  form  of  insurance  are  paid  annually,  semi-annually,  or 
quarterly,  under  the  level  premium  plan  for  the  whole  of  life, 
while  the  proceeds  of  the  policy  may  at  the  option  of  the  in- 
sured be  paid  either  in  one  lump  sum  or  on  the  installment 
plan. 

Furnishes  Permanent  Protection. —  Several  advantages 
may  be  noted  as  essentially  associated  with  this  plan  of 
insurance.  In  the  first  place  it  gives  the  insured  permanent 
protection  at  moderate  cost,  and  this  is  highly  important  for 
the  average  man  of  moderate  salary  or  daily  wage  who  re- 
quires considerable  family  protection  and  whose  limited  in- 
come does  not  enable  him  both  to  pay  premiums  and  to  ac- 
cumulate a  savings-bank  fund.  Term  insurance  is  essentially 
designed  to  afford  protection  against  a  temporary  family  or 
business  hazard,  and  can  be  recommended  safely  only  when 
it  is  definitely  known  that  the  hazard  under  consideration  is 

72 


ORDINARY  LIFE  INSURANCE  73 

temporary  in  character.  But  such  contracts,  as  we  have  noted, 
contain  elements  of  danger  which  are  inseparable  from  tem- 
porary insurance.  The  chief  danger  connected  with  such 
insurance  is  that  the  insured  may  have  miscalculated  the 
duration  of  the  hazard  confronting  him  and  his  future  need 
for  protection,  or  may  neglect  to  carry  out  his  original  pur- 
pose to  convert  his  temporary  insurance  into  or  replace  it 
with  policies  which  afford  protection  for  the  whole  of  life. 
Under  ordinary  life  insurance  all  danger  as  to  miscalculations 
relative  to  the  uncertain  future  need  of  insurance  or  the  fail- 
ure to  carry  out  original  purposes  is  obviated.  Such  insur- 
ance is  certain  in  its  results  in  that  it  provides  protection  that 
is  permanent,  payable  in  the  event  of  death,  whether  that 
occur  early  or  late,  and  purchasable  at  a  definite  and  moder- 
ate premium  which  remains  uniform  throughout  life. 

Furnishes  Permanent  Protection  at  the  Smallest  Initial 
Outlay. —  As  has  been  aptly  stated  "  the  ordinary  life  policy 
is  of  all  policies  the  one  which  gives  the  maximum  of  perma- 
nent protection  at  a  minimum  annual  charge."  This  may  be 
illustrated  by  comparing  the  gross  premium  charged  by  com- 
panies for  ordinary  life  policies  with  those  required  under  the 
limited  payment  and  endowment  plans.  For  instance,  the 
annual  premium  charged  by  a  certain  company  per  $1,000 
of  ordinary  life  insurance  is  $19  at  age  25,  $21.80  at  age  30> 
and  $25.45  at  age  35.  On  a  twenty-payment  life  policy  at 
the  same  ages  the  annual  premiums  charged  by  this  company 
are  $26.75,  $29.70,  and  $33.28;  while  on  an  endowment  pol- 
icy, maturing  in  twenty  years,  the  premiums  are  respectively 
$44.82,  $45.63,  and  $46.70.  It  is  therefore  seen  that  the  or- 
dinary life  policy  furnishes  permanent  protection  at  the  small- 
est initial  outlay,  although,  as  will  be  shown  later,  the  limited- 
payment  and  endowment  policies  will,  if  the  insured  continues 
to  live,  ultimately  yield  certain  advantages  which  probably 
induced  the  insured  to  prefer  these  forms  and  which  will 
compensate  for  the  higher  premium.  In  case  of  early  death, 
however,  the  insured  would  realize  the  same  amount  under 
each  of  the  aforementioned  policies,  yet  the  outlay  on  the 


74  THE  PRINCIPLES  OF  LIFE  INSURANCE 

part  of  the  insured  would  have  been  considerably  greater 
under  the  limited-payment  and  endowment  plans  than  under 
the  ordinary  life  policy. 

Owing  to  its  moderate  annual  cost,  an  ordinary  life  policy 
tends  to  bring  adequate  protection  within  the  reach  of  nearly 
all.  It  is  particularly  well  adapted  to  those  whose  income  is 
small  and  who  find  desirable  a  considerable  amount  of  perma- 
nent protection.  To  the  rich  man,  on  the  other  hand,  the 
policy  affords  ample  protection  and  enables  him  to  use  any 
surplus  money  to  better  advantage  probably  than  if  allowed 
to  accumulate  with  an  insurance  company.  The  policy  is  also 
well  adapted  to  persons  who,  although  having  passed  middle 
life,  may  still  desire  the  largest  amount  of  permanent  pro- 
tection at  the  lowest  cost.  Even  at  ages  45  and  50  the  an- 
nual premiums  charged  by  the  aforementioned  "company  are, 
respectively,  only  $36.50  and  $45.10 ;  while  for  a  twenty-pay- 
ment life  policy  at  the  same  ages  the  premiums  are  $43.46 
and  $51.26,  and  for  an  endowment  policy,  maturing  in  twenty 
years,  $51.45  and  $56.55. 

Combines  Saving  with  Insurance. —  Besides  its  moderate 
cost  and  the  permanent  character  of  the  protection  offered, 
the  ordinary  life  policy  furnishes  the  further  advantage  of 
combining  saving  with  insurance.  In  term  insurance,  as 
already  explained,  nearly  all  of  the  premium  represents  pay- 
ment for  the  current  protection,  and  the  companies  follow  the 
practice  of  not  refunding  anything  upon  withdrawal.  More- 
over, under  term  insurance  nothing  is  paid  to  the  insured  in 
case  of  survival  at  the  expiration  of  the  term,  and  it  is  this 
fact  that  constitutes  one  of  the  chief  objections  to  this  type  of 
insurance,  it  being  most  difficult,  as  previously  stated,  to 
make  the  average  holder  of  such  a  policy,  after  he  has  paid 
ten  or  twenty  premiums,  appreciate  the  fact  that  he  has  al- 
ready received  full  value  in  the  form  of  protection  for  the 
premiums  paid,  and  that  he  is  therefore  not  entitled  to  receive 
any  refund. 

As  contrasted  with  this  shortcoming,  the  ordinary  life  pol- 
icy presents  an  entirely  different  situation.  In  the  early 


ORDINARY  LIFE  INSURANCE 


75 


years  of  such  a  policy  the  annual  level  premium  is  much  in 
excess  of  the  amount  required  to  pay  the  current  cost  of  the 
insurance  protection,  the  balance  being  retained  by  the  com- 
pany as  a  reserve  (called  the  legal  reserve)  and  improved  at 
compound  interest  at  an  agreed  rate  for  the  purpose  of 
making  good  the  deficiency  in  the  later  years  of  life  when  the 
annual  level  premium  is  no  longer  sufficient  to  pay  for  the 
actual  cost  of  the  insurance.  The  overcharges  in  the  early 
premiums  are  instrumental  in  inculcating  thrift  on  the  part 
of  the  insured  and  in  the  great  majority  of  instances,  repre- 


GUAEANTEED  VALUES 

Age:  35.    Amount:  $10,000.    Annual  Premium:  $270. 
Plan:  Ordinary  Life. 


NUMBER  OF 
YEARS  AFTER 
POLICY  HAS 
BEEN  IN  FORCE 

CASH  OR 
LOAN  VALUE 

PARTICIPATING 
PAID-UP 
INSURANCE 

EXTENSION 
PARTICIPATING 

YEARS 

DAYS 

3 

$    397.60 

$   900 

4 

183 

4 

537.70 

1,190 

6 

7 

5 

681.60 

1,480 

7 

182 

6 

829.40 

1,770 

8 

326 

7 

981.10 

2,060 

10 

57 

8 

1,136.80 

2,340 

11 

100 

9 

1,296.50 

2,620 

12 

87 

10 

1,460.10 

2,890 

13 

21 

11 

1,627.60 

3,160 

13 

269 

12 

1,798.70 

3,430 

14 

108 

13 

1,973.50 

3,690 

14 

271 

14 

2,151.60 

3,950 

15 

33 

15 

2,332.80 

4,200 

15 

128 

.    16 

2,516.80 

4,450 

15 

196 

17 

2,703.40 

4,690 

15 

239 

18 

2,892.20 

4,920 

15 

259 

19 

3,083.20 

5,150 

15 

261 

20 

3,275.80 

5,370 

15 

245 

21 

3,470.00 

5,590 

15 

215 

22 

3,665.20 

5,790 

15 

172 

23 

3,861.40 

6,000 

15 

118 

24 

4,058.10 

6,190 

15 

54 

25 

4,254.90 

6,380 

14 

348 

The  values  given  above  will  be  increased  by  any  surplus  or  addi- 
tions standing  to  the  credit  of  the  Policy. 


76         THE  PRINCIPLES  OF  LIFE  INSURANCE 

sent  a  saving  —  an  accumulation  of  small  amounts  promptly 
invested  by  the  company  —  which  would  otherwise  not  have 
been  earned  or,  if  earned,  would  have  been  lost  or  needlessly 
wasted.  The  fund  thus  accumulated  out  of  the  overcharges 
in  the  early  premiums  does  not  belong  to  the  company,  but  is 
held  in  trust  by  it  for  the  policyholder.  It  represents  the 
"  cash  value  "  of  the  policy,  and  may  either  be  withdrawn  by 
the  insured,  in  whole  or  to  a  certain  designated  percentage, 
if  he  decides  to  lapse  the  policy,  or  be  made  the  basis  of  a 
loan,  usually  at  5  or  6  per  cent.,  to  be  used  in  time  of  illness, 
financial  emergency,  or  business  opportunity.  The  loan  privi- 
lege also  is  often  valuable  in  that  it  enables  the  insured  to 
keep  his  policy  alive  for  its  full  amount  under  temporary  cir- 
cumstances when  the  payment  of  the  premium  would  other- 
wise not  be  possible.  The  extent  to  which  such  cash  or  loan 
values  accumulate  may  be  illustrated  by  the  table  on  page  75, 
which  furnishes  the  figures  for  the  first  twenty-five  years  of 
a  $10,000  ordinary  life  policy  issued  by  a  company  which 
grants  such  values  at  the  beginning  of  the  third  year  and  to 
the  full  extent  of  the  legal  reserve. 

Usually  cash  or  loan  values  are  not  granted  by  the  com- 
panies until  at  least  three  annual  premiums  have  been  paid. 
Usually,  also,  the  companies  do  not  refund  the  entire  legal 
reserve  during  the  first  ten,  fifteen,  or  twenty  years,  but  retain 
a  fixed  percentage  thereof  as  a  surrender  charge.  In  the 
above  illustration  it  will  be  observed  that  the  cash  value  of 
the  $10,000  policy  has  accumulated  to  $4,254.90  during  the 
first  twenty-five  years,  and  this  accumulation  continues  until 
it  reaches  the  face  value  of  the  policy  by  age  96,  the  last 
year  in  the  American  Experience  table. 

Disadvantage  of  Continuous  Premium  Payments. —  The 
chief  objection  usually  advanced  against  ordinary  life  insur- 
ance is  the  continued  payment  of  the  premium  throughout  life. 
This  objection,  however,  is  more  apparent  than  real,  and  may 
at  the  option  of  the  insured  be  obviated  to  some  extent  by 
allowing  the  annual  dividends  to  accumulate  with  the  com- 
pany with  the  view  of  either  shortening  the  premium-paying 


ORDINARY  LIFE  INSURANCE  77 

period  or  hastening  the  maturity  of  the<  contract.  Under  the 
first  option  the  contract  becomes  a  paid-up  policy  for  the  full 
amount  after  a  period  of  years  —  thus  requiring  no  further 
premium  payments  —  the  insurance,  however,  being  still  pay- 
able at  death  only.  Under  the  second  option  the  dividend 
accumulations  on  the  policy  cause  it  to  mature  as  an  endow- 
ment at  an  earlier  age,  thus  enabling  the  insured  to  realize  the 
proceeds  before  death  occurs. 

The  cash  surrender  and  other  options  allowed  under  an 
ordinary  life  policy  may  also,  under  certain  circumstances, 
make  desirable  a  discontinuance  of  premium  payments. 
Changing  circumstances  may  cause  the  insured  to  desire  the 
taking  of  any  one  of  three  important  options  customarily  al- 
lowed by  the  companies.  If  the  policy  has  served  its  pro- 
tective purpose  and  the  insured  is  satisfied  that  the  change 
in  his  circumstances  is  such  as  no  longer  to  require  insur- 
ance protection  and  does  not  wish  the  full  face  value  of 
the  policy  for  legacies  or  bequests,  he  may  surrender  the 
policy  to  the  company  for  its  cash  value.  Or,  instead  of  tak- 
ing the  cash  value,  the  insured  may  choose  the  option  of  stop- 
ping premium  payments  and  taking  a  paid-up  policy,  payable 
upon  death  to  his  estate  or  designated  beneficiary.  The 
amount  of  paid-up  insurance  which  the  companies  grant  after 
the  policy  has  been  in  force  a  specified  number  of  years  is 
indicated  in  column  three  of  the  preceding  table,  and  repre- 
sents the  amount  of  insurance  that  can  be  purchased  at  the 
then  attained  age  with  a  net  single  premium  equal  to  the  sur- 
render value.  The  amounts,  it  will  be  observed,  are  very  con- 
siderable in  the  later  years,  the  face  value  of  the  paid-up  insur- 
ance granted  on  the  $10,000  policy,  after  the  same  has  been 
in  force  twenty-five  years,  being  $6,380. 

Lastly,  it  may  happen  that  the  policyholder  contracts  some 
fatal  disease  or  meets  with  some  accident  which  incapacitates 
him  for  the  earning  of  future  premiums.  Under  such  cir- 
cumstances the  necessity  for  insurance  is  greater  than  ever, 
and  the  policyholder  is  allowed  to  avail  himself  of  the  option 
of  "extended  insurance,"  which  means  that  he  can  without 


78  THE  PRINCIPLES  OF  LIFE  INSURANCE 

further  premium  payments  enjoy  the  full  benefit  of  his  orig- 
inal policy  for  a  designated  number  of  years  and  days.  This 
option  may  also  be  chpsen,  even  though  the  ability  to  pay 
premiums  continues,  when  the  insured  is  satisfied  that  his 
physical  condition  is  such  as  to  prove  fatal  before  the  expira- 
tion of  the  term  during  which  extended  insurance  is  granted. 
The  duration  of  the  term  of  extended  insurance  as  allowed  by 
the  companies  will  again  depend  upon  the  cash  value  of  the 
policy,  which  is  used  as  a  single  premium  to  purchase  insur- 
ance at  the  then  attained  age.  The  respective  amounts  on  the 
$10,000  policy,  used  for  purposes  of  illustration,  are  shown 
in  the  fourth  and  fifth  columns  of  the  preceding  table.  Thus, 
it  will  be  observed,  for  example,  that  after  this  policy  has 
been  in  force  nineteen  years  it  may  be  extended  for  its  full 
face  value,  without  further  premium  payments,  for  a  term  of 
fifteen  years  and  two  hundred  and  sixty-one  days. 


CHAPTER  VII 
LIMITED-PAYMENT   POLICIES 

Under  the  terms  of  these  contracts  the  face  of  the  policy 
is  not  payable  until  maturity,  but  premiums  are  charged  for  a 
limited  number  of  years  only  after  which  the  policy  becomes 
paid-up  for  its  full  amount.  This  method  of  paying  premi- 
ums is  applied  to-day,  if  the  insured  so  desires,  to  practically 
all  of  the  leading  types  of  contracts  sold.  Its  most  popular 
application,  however,  has  been  in  connection  with  whole-life 
policies,  and  its  nature  and  advantages  will,  therefore,  be  dis- 
cussed from  the  standpoint  of  this  type  of  contract.  Ordi- 
nary whole-life  policies  involve  the  payment  of  an  annual 
level  premium  until  a  claim  ensues  through  death.  But  under 
the  limited-payment  plan  premium  payments,  instead  of  con- 
tinuing indefinitely,  may  be  fixed  at  almost  any  number  of 
years,  from  one  to  thirty,  or  even  more.  Customarily  the 
payments  cease  after  ten,  fifteen,  or  twenty  years,  but  life 
policies  providing  for  twenty-five  or  thirty  premiums  are  not 
uncommon,  and  in  a  mutual  company  the  stipulated  term 
may  be  further  reduced  by  applying  the  dividends  for  that 
purpose.  If  premiums  are  limited  to  twenty  years,  for  exam- 
ple, and  this  seems  to  be  the  favorite  choice  of  the  public,  the 
policy  is  known  as  "a  twenty-payment  life  policy." 

Necessity  for  Larger  Premiums  Under  This  Plan  During 
the  Premium-Paying  Period. —  Since  limited-payment  poli- 
cies require  the  payment  of  premiums  during  a  term  which 
averages  less  than  the  term  of  the  contract,  it  follows  that 
the  annual  level  premium  under  this  plan  is  larger  than  that 
necessary  when  premium  payments  continue  throughout  the 
life,  of  the  policy.  The  purpose  of  the  plan  is  to  have  the 
policyholder  pay  an  extra  amount  annually  during  the  fixed 

79 


THE  PKINCIPLES  OF  LIFE  INSUKANCE 


premium-paying  period  so  that  after  the  termination  of  this 
period  the  policy  may  be  carried  to  successful  completion 
without  further  financial  obligation  on  the  part  of  the  insured. 
Thus  in  the  case  of  a  limited-payment  life  policy,  the 
ten,  fifteen,  or  twenty  premiums  called  for  by  the  contract 
represent  on  the  average  a  total  sum  sufficiently  larger  than 
the  aggregate  amount  paid  on  the  average  during  the  same 
period  under  the  continuous  annual  level  premium  plan,  to 
enable  the  company  to  accumulate  an  amount  which  will  be 
sufficient,  together  with  compound  interest  earnings  at  an 
assumed  rate,  to  carry  the  policy  thereafter  to  its  maturity 
without  further  charges  upon  the  insured.  While  the  mathe- 
matics underlying  the  computation  of  net  premiums  on  the 
limited  payment  plan  is  referred  to  in  Chapter  XV,  the 
manner  of  applying  the  principle  in  actual  practice  may  be 
illustrated  by  the  following  rates  x  taken  from  the  rate  book 
of  the  company  already  used  for  purposes  of  illustration 
in  the  two  preceding  chapters.  The  rates  presented  are  those 
charged  by  the  company  at  various  selected  ages  on  a  whole- 
life  policy  on  the  ten-,  fifteen-,  and  twenty-payment  plans, 
and  the  rates  on  the  continuous-payment  plan  are  also  given 
so  that  a  comparison  may  be  made. 

PREMIUM  RATES  TO  SECURE  $1,000  PAYABLE  AT  DEATH 


AGE 

WHOLE  OF 
LITE 

10  YEARS 

15  YEARS 

20  YEARS 

20 

16.60 

38.30 

28.96 

24.16 

25 

19.00 

42.34 

32.06 

26.75 

30 

21.80 

46.80 

35.50 

29.70 

35 

25.45 

52.00 

39.60 

33.28 

40 

30.25 

58.46 

44.74 

37.84 

45 

36.50 

65.82 

50.80 

43.46 

50 

45.10 

75.20 

58.94 

51.26 

55 

56.50 

86.75 

69.52 

61.84 

60 

72.70 

101.68 

83.98 

76.80 

i  These  rates  are  merely  used  for  illustrative  purposes.  It  should 
be  noted  that  the  gross  premiums  charged  by  different  companies 
vary  considerably,  and  that  in  mutual  companies  these  premiums 
are  considerably  reduced  through  the  distribution  of  dividends. 


LIMITED-PAYMENT  POLICIES  81 

An  examination  of  the  table  shows  that  the  fewer  the  num- 
ber of  premium  payments  the  larger  each  payment  will  be. 
Thus  at  age  20  a  whole-life  policy  with  premiums  payable 
until  the  policy  becomes  a  claim  will  cost  $16.60  in  this  com- 
pany. If  the  insured,  however,  prefers  to  pay  for  the  policy 
in  twenty  installments,  each  premium  will  amount  to  $24.16 ; 
while  if  paid  in  fifteen  or  ten  installments,  the  premium  will 
increase,  respectively,  to  $28.96  and  $38.30,  the  last  figure,  it 
will  be  noted,  being  more  than  double  the  premium  charged 
at  /this  age  under  the  continuous-payment  plan. 

Owing  to  the  heavier  premiums  the  limited-payment  plan 
is  not  well  adapted  to  those  whose  income  is  small  and  whose 
need  for  insurance  protection  is  so  great  as  to  require  em- 
phasis on  the  amount  of  protection  rather  than  the  accumu- 
lation of  a  fund  with  the  company,  especially  when  there  is 
reason  to  believe  that  the  income  out  of  which  premiums  may 
conveniently  be  paid  will  be  much  greater  in  the  future  than  it 
is  at  present.  Furthermore,  many  policyholders,  amply  able 
to  pay  premiums,  may  feel  that  a  policy  requiring  continuous 
payments  will  fit  their  needs  better  than  a  limited-payment 
contract,  since  it  enables  them  to  use  the  difference  in  the 
premiums  to  better  advantage  perhaps  than  if  allowed  to 
accumulate  with  an  insurance  company. 

Nor  is  the  use  of  the  limited-payment  principle  advanta- 
geous under  the  circumstances  described  in  the  chapter  on 
"  Term  Insurance."  Here  we  saw  that  situations  may  fre- 
quently arise  which  require  the  subordination  of  the  invest- 
ment feature  in  life  insurance  to  its  protective  function  to 
such  an  extent  as  to  preclude  or  render  disadvantageous  the 
taking  out  of  even  whole-life  insurance  by  continuous  pay- 
ments, much  less  the  limited-payment  plan.  Especially  is 
this  true  of  young  professional  or  business  men  who  are  just 
beginning  their  career  and  who,  appreciating  the  necessity 
for  adequate  family  protection,  may  feel  that  their  special 
circumstances  require  the  use  of  term  insurance  as  a  means 
of  securing  heavy  protection  at  the  least  possible  cost  during 
the  years  when  they  are  seeking  to  establish  themselves  in 


82  THE  PRINCIPLES  OF  LIFE  INSURANCE 

their  calling.  Such  persons,  as  was  stated,  wanting  heavy 
protection  during  early  years,  may  feel  that  they  can  more 
advantageously  use  all  available  savings  in  their  profession 
or  business.  Or,  looking  forward  to  a  much  larger  income 
later  in  life,  they  may  reason  that  they  can  then  advanta- 
geously replace  or  supplement  this  type  of  contract  with 
policies  of  other  kinds  which  have  permanent  protection  or 
saving  as  their  primary  purpose.  It  is  also  clear  that  the 
limited-payment  plan  will  not  appeal  to  those  who  desire  pro- 
tection against  some  temporary  business  or  family  hazard, 
the  duration  of  which  is  definitely  known. 

Advantages  of  the  Limited-Payment  Plan.—  Having  re- 
ferred to  the  shortcomings  of  limited-payment  policies  when 
viewed  in  the  light  of  special  circumstances,  we  may  next 
note  the  conditions  under  which  this  method  of  paying  pre- 
miums may  prove  desirable.  Certainly,  the  willingness  to 
pay  a  larger  annual  premium  must  be  justified  by  advantages 
which  will  compensate  for  the  sacrifice.  Two  important  ad- 
vantages present  themselves  and  may  be  stated  briefly  as 
follows : 

1.  Premium  payments  may  be  limited  to  the  produc- 
tive period  of  life. —  Instead  of  continuing  for  an  indefinite 
period,  the  premium-paying  years  may  be  so  limited  in  num- 
ber as  to  correspond  to  the  income-producing  years.  Not 
only  is  there  satisfaction  for  many  people  in  knowing  the 
maximum  amount  which  they  can  be  asked  to  pay  on  a  pol- 
icy, but  for  the  great  majority  of  men  between  the  ages  of 
25  and  40,  engaged  in  the  average  walks  of  life,  the  next 
thirty,  twenty,  or  fifteen  years,  depending  upon  the  age  under 
consideration,  represent  the  really  productive  period  of  their 
working  lives.  As  regards  the  great  majority,  these  years, 
and  not  the  years  of  old  age,  can  through  a  little  extra  e.ffort 
and  economy  be  made  the  years  of  surplus.  It  is  therefore 
argued  that  the  average  man  should  take  advantage  of  that 
period  in  his  working  life  when  money  comes  in  most  freely, 
to  pay  a  somewhat  higher  premium,  in  order  to  free  himself 
in  old  age  from  any  payment  whatever.  Using  the  rates 


LIMITED-PAYMENT  POLICIES  83 

cited  above,  a  person  insuring  at  age  25  is  given  the  option 
by  the  company  of  making  his  whole-life  policy  paid-up  by 
the  time  he  becomes  forty-five  years  old  by  paying  an  extra 
annual  sum  of  $7.75  per  thousand  dollars  of  insurance  for 
twenty  years.  As  previously  stated,  less  than  one  in  ten  of 
our  population  succeeds  in  accumulating  a  reasonable  com- 
petence by  the  time  age  50  is  reached,  and  through  reverses  in 
business  or  investments  a  great  majority  of  this  limited 
number  lose  the  same  before  death.  Now  why  not  use  the 
productive  years,  the  supporters  of  the  limited-payment  plan 
argue,  to  protect  one's  insurance  against  such  a  contingency? 
As  the  management  of  one  company  admirably  states  in  re- 
ferring to  a  twenty-payment  life  policy : * 

The  period  of  twenty  years  is  not  so  short  as  to  make  the  dis- 
count of  future  payments  too  heavy,  nor  so  long  as  to  extend 
these  payments  far  into  the  future,  thereby  defeating  the  wise 
purpose  of  avoiding  them  late  in  life.  .  .  .  After  twenty  years 
the  insured  has  completed  his  side  of  the  agreement  and  reaps 
the  reward  of  prudence  and  persistency.  His  estate,  the  value 
of  the  policy,  is  an  accomplished  fact  —  bought,  paid  for  and 
standing  to  his  credit.  Nothing  can  take  it  from  him,  nothing 
can  reopen  the  account  —  it  is  beyond  peradventure.  At  his 
death  the  company  instantly  discharges  its  side  of  the  contract 
by  the  simple  transfer  of  the  property.  .  .  .  Here  then,  is  a 
present  plan  for  future  security.  The  ordinarily  vigorous  and 
most  productive  years  of  life  pay  toll  for  the  fullness  of  years 
sometimes  attained  without  fullness  of  pocket.  Thus  the  bur- 
den is  put  where  it  can  more  easily  be  carried,  and  the  relief 
in  later  life  always  abundantly  justifies  the  earlier  foresight. 

2.  Combines  saving  with  insurance. —  The  limited- 
payment  life  policy  affords  the  advantage  of  combin- 
ing saving  with  insurance,  assuming  that  the  policyhplder 
desires  to  accomplish  this  purpose,  to  an  even  greater  degree 
than  was  noted  in  connection  with  whole-life  insurance  by 
continuous  payments.  The  extent  to  which  cash  or  loan  values 
accumulate,  for  example,  under  a  $10,000  twenty-payment 

1N«w  England  Mutual  Life  Insuraiicu  Co. 


84 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


life  policy  at  age  thirty-five  is  indicated  for  the  first  twenty- 
five  years  in  the  following  table  of  values  guaranteed  by  the 
same  company  whose  cash  and  loan  values  were  used  for 
purposes  of  illustration  in  connection  with  an  ordinary  life 
policy : 

GUARANTEED  VALUES 

Age:  35.     Amount:  $10,000.     Annual  Premium:  $367. 
Plan:  Life,  20  Payments. 


NUMBER  OF 
YEARS  AFTER 
POLICY  HAS 
BEEN  IN  FORCE 

CASH  OR 
LOAN  VALUE 

PARTICIPATING 
PAID-UP 
INSURANCE 

PARTICIPATING 
EXTENSION 

YEARS 

DAYS 

3 

$    682.00 

$1,540 

7 

334 

4 

924.60 

2,050 

10 

212 

5 

1,175.20 

2,560 

13 

14 

6 

1,434.00 

3,060 

15 

75 

7 

1,701.40 

3,570 

17 

28 

8 

1,977.70 

4,070 

18 

246 

9 

2,263.10 

4,570 

20 

16 

10 

2,557.80 

5,070 

21 

81 

11 

2,862.40 

5,570 

22 

93 

12 

3,176.80 

6,060 

23 

64 

13 

3,501.60 

6,550 

24 

8 

14 

3,837.00 

7,040 

24 

307 

15 

4,183.30 

7,530 

25 

249 

16 

4,541.10 

8,020 

26 

220 

17 

4,910.70 

8,520 

27 

247 

18 

5,293.10 

9,010 

29 

9 

19 

5,688.90 

9,500 

31 

25 

20 

6,099.20 

10,000 

Paid  up 

21 

6,211.80 

22 

6,325.10 

23 

6,438.90 

24 

6,553.00 

25 

6,667.20 

The  values  given  above  will  be  increased  by  any  surplus  or  addi- 
tions standing  to  the  credit  of  the  Policy. 

Comparing  the  above  table  with  the  corresponding  table  for 
an  ordinary  life  policy  (see  page  75)  we  find  that  the 
premium  charged  on  the  $10,000  twenty-payment  life  policy 
at  age  35  is  $367  in  this  company  as  compared  with  $270 
for  the  same  policy  on  the  continuous-payment  plan.  But  it 


LIMITED-PAYMENT  POLICIES  85 

will  be  noticed  that  the  larger  premium  on  the  limited-pay- 
ment contract  results  in  a  much  more  rapid  yearly  growth 
of  values  under  the  policy.  Whereas  the  cash  or  loan  value 
given  under  the  ordinary  life  policy  amounts  to  $397.60 
after  the  policy  has  been  in  force  three  years,  the  corre- 
sponding value  equals  $682  under  the  twenty-payment  policy. 
Similarly,  the  cash  or  loan  values  of  $1,460.10  and  $3,275.80 
under  the  ordinary  life  policy  after  it  has  been  in  force  ten 
and  twenty  years  respectively  contrasts  with  corresponding 
values  of  $2,557.80  and  $6,099.20  under  the  twenty-payment 
contract.  This  larger  accumulation  under  the  limited-pay- 
ment plan  is  the  result  of  the  sacrifice  necessary  to  meet 
the  larger  premium.  Those  supporting  the  plan  argue  that 
it  encourages  thrift  and  that  the  extra  sum  accumulated  would 
not  otherwise  have  been  saved  in  the  great  majority  of  in- 
stances. The  increased  premium  can,  it  is  asserted,  easily  be 
paid  by  many  if  they  only  resolve  to  do  so,  with  the  result 
that  a  little  determination  will  lead  to  the  accumulation  of 
a  fund  of  large  dimensions. 

Paid-up  and  Extension  Benefits  Under  the  Limited- 
Payment  Plan. —  As  was  explained  in  the  previous  chapter 
various  contingencies  may  arise  which  may  cause  the  insured 
to  view  a  policy  differently  from  the  way  he  did  when  he  pur- 
chased it  and  which  may  induce  him  either  to  surrender  it 
or  to  discontinue  the  payment  of  premiums.  This  attitude 
may  be  caused  by  any  one  of  several  events,  such  as  loss  of 
earning  capacity,  death  of  one's  dependents,  or  impairment 
of  health  to  such  an  extent  as  to  make  death  certain  during 
the  period  for  which  extended  insurance  is  granted.  Under 
such  circumstances  the  insured  may  realize  the  guaranteed 
values  of  his  contract  as  they  stand  at  the  time.  Either  he 
may  surrender  the  policy  for  its  cash  value  or  effect  a  loan 
against  that  value,  and  this  cash  or  loan  value  we  have  seen 
is  considerably  larger  under  the  limited-payment  than  under 
the  continuous-payment  plan.  Or  the  insured  may  exercise 
the  option  of  taking  paid-up  or  extended  insurance,  and  these 
benefits,  since  the  larger  cash  value  is  used  as  a  single 


86  THE  PRINCIPLES  OF  LIFE  INSURANCE 

premium  to  purchase  paid-up  or  extended  insurance  at  the 
then  attained  age,  will  be  greater  than  under  the  ordinary 
life  policy. 


CHAPTEE  VIII 
ENDOWMENT  INSURANCE 

Definition  and  Types  of  Policies. —  All  the  policies  dis- 
cussed in  the  three  preceding  chapters  provide  for  the  payment 
of  the  full  amount  of  the  policy  only  in  the  event  of  death. 
Endowment  policies,  on  the  contrary,  provide  not  only  for  the 
payment  of  the  face  of  the  policy  upon  the  death  of  the  insured 
during  a  fixed  term  of  years,  but  also  for  the  payment  of  the 
full  amount  at  the  end  of  said  term  if  the  insured  be  living. 
Whereas  policies  payable  only  in  the  event  of  death  are  es- 
sentially taken  out  for  the  benefit  of  others,  endowment  poli- 
cies, although  affording  protection  to  others  against  the  death 
of  the  insured  during  the  fixed  term,  usually  revert  to  the 
insured  if  he  survive  the  endowment  period.  Such  poli- 
cies, therefore,  have  become  popular  in  recent  years  as 
a  convenient  means  of  accumulating  a  fund  which 
will  afterwards  become  available  for  the  use  of  the  policy- 
holder. 

An  examination  of  the  contracts  issued  by  different  com- 
panies shows  many  variations  in  the  use  of  the  endowment- 
insurance  principle.  Such  policies  may  be  made  payable  in 
ten,  fifteen,  twenty,  twenty-five,  thirty  or  more  years,  or  the 
length  of  the  term  may  be  so  arranged  as  to  cause  the  policy 
to  mature  at  certain  ages,  such  as  60,  65,  70,  etc.  When 
written  for  such  terms  the  purpose  of  the  policy  usually  is  to 
combine  immediate  protection  with  saving;  while  if  written 
for  long  terms  or  to  mature  at  an  advanced  age  the  object 
is  usually  to  combine  protection  with  old-age  provision.  Usu- 
ally the  contracts  are  paid  for  by  premiums  (payable  an- 
nually, semi-annually  or  quarterly)  continuing  throughout 
the  term,  but  if  desired  the  premiums  may  be  paid  on  the 

87 


88         THE  PRINCIPLES  OF  LIFE  INSURANCE 

limited-payment  plan,  as,  for  example,  a  thirty-year  endow 
ment  paid-up  in  twenty  years. 

Other  applications  of  the  endowment  principle  have  already 
been  referred  to  in  the  chapter  on  "  Classification  of  Policies/' 
but  may  again  briefly  be  recapitulated.  Thus  there  may  be 
"double  endowments"  or  "semi-endowments,"  the  first 
meaning  that  the  amount  payable  upon  survival  is  twice  that 
paid  in  the  event  of  death,  and  the  last  meaning  that  the  sum 
payable  upon  survival  is  only  half  as  large  as  the  amount 
promised  upon  death.  Various  kinds  of  "child  endowment 
policies"  are  also  issued  by  certain  companies.  Sometimes 
these  policies,  besides  guaranteeing  the  payment  of  a  fixed 
amount  upon  the  attainment  by  the  child  of  a  specified  age, 
also  provide  for  the  return  in  full  of  the  premiums  paid  in 
the  event  of  the  child's  death  before  reaching  the  endowment 
age.  Or,  the  policy  may  be  issued  without  the  return  of 
premium  privilege  in  the  event  of  the  child's  death,  the  only 
benefit  under  the  policy  in  this  instance  being  the  amount 
payable  on  survival.  Sometimes  it  is  provided  that  upon  the 
death  of  the  purchaser  of  the  policy,  usually  the  father, 
premium  payments  shall  cease,  the  policy  becoming  full- 
paid  and  the  principal  becoming  due  when  the  child  reaches  the 
endowment  age.  In  still  other  instances  the  policy  may  be 
issued  on  a  child's  life  at  an  early  age,  say  at  age  five,  the  un- 
derstanding being  that  the  policy  will  not  come  into  full  force 
until  the  insured  reaches  a  specified  age  (say  age  21)  and  will 
then  mature  as  an  endowment  at,  say,  age  50.  These  policies, 
furthermore,  may  again  be  issued  with  or  without  the  return- 
premium  privilege. 

Analysis  of  an  Endowment  Policy. —  Two  explanations 
have  been  offered  as  an  analysis  of  the  nature  of  endowment 
insurance.  Under  the  first,  and  this  is  the  usual  analysis, 
the  policy  is  explained  as  consisting  of  (1)  "pure-endow- 
ment" insurance  and  (2)  "term"  insurance.  This  analysis 
looks  upon  the  contract  as  a  combination  of  a  level  term 
insurance,  promising  to  pay  $1,000  in  case  of  death  at  any 
time  during  the  term,  and  a  pure  endowment  of  the  same 


ENDOWMENT  INSURANCE  89 

amount  payable  only  upon  survival  at  the  end  of  the  term. 

Several  writers,  however,  while  admitting  that  the  above 
analysis  is  correct  and  convenient  for  purposes  of  mathe- 
matical computation,  maintain  that  the  pure  endowment  does 
not  offer  the  correct  explanation  of  an  endowment-insurance 
contract ;  that  there  is  another  and  more  logical  method  of  ex- 
planation and  one  agreeing  more  closely  with  actuarial  practice. 
This  newer  explanation  likewise  divides  endowment  policies 
into  two  parts.  But  the  investment  part  of  the  contract,  and 
this  is  the  fundamental  difference,  is  not  considered  a  pure  en- 
dowment, all  of  which  is  lost  in  case  of  death  before  the  end  of 
the  term,  but  is  strictly  a  savings-bank  accumulation  which  is 
available  at  any  time  to  the  insured  through  surrender  or  ma- 
turity of  the  policy.  This  investment  feature  is  supple- 
mented by  term  insurance,  which  is,  however,  not  a  level  term 
insurance  of  $1,000  in  amount  at  any  time,  but  an  insurance 
of  an  amount  which  added  to  the  investment  accumulated  at 
the  date  of  death  will  make  the  amount  of  the  policy  payable 
equal  to  $1,000.  The  insurance  portion  of  the  contract 
therefore  is  for  a  decreasing  amount,  being  nearly  equal  to 
$1,000  in  the  early  years  of  the  contract  and  gradually  de- 
creasing throughout  the  term.  Thus,  if  at  a  particular  time 
a  $1,000  endowment  policy  has  an  investment  accumulation  of 
$150,  the  insured  will  be  protected  by  $850  insurance  against 
death,  but  when  the  accumulation  reaches  $900  there  will  be 
term  insurance  for  but  $100.  The  premium  for  the  policy 
may  be  divided  into  two  parts,  one  part  for  the  investment 
and  one  for  the  decreasing  term  insurance. 

Premiums  Charged  for  Endowment  Policies. —  Since  the. 
company's  liability  under  an  endowment  policy  involves  not 
only  the  payment  of  the  insurance  upon  death  but  also  the 
full  amount  of  the  policy  upon  survival  of  the  term,  it  follows 
that  the  annual  premium  on  such  policies  is  necessarily  much 
higher,  except  for  very  long  endowment  periods  where  the 
rate  is  only  slightly  higher,  than  that  charged  on  an  ordinary 
life  policy.  An  examination  of  the  following  table  of  rates 
(charged  by  the  same  company  whose  rates  were  used  for 


90 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


purposes  of  illustration  in  the  preceding  chapters)  shows 
this  to  be  especially  true  when  the  endowment  period  is  a 
short  one.  The  large  difference  here  indicated,,  although  ac- 
counted for  in  part  by  the  heavier  loading  on  endowment 
premiums,  is  due  chiefly  to  the  necessity  of  accumulating 
more  rapidly  the  investment  portion  of  the  endowment  policy 
in  order  to  have  it  equal  the  full  face  value  at  the  end  of  the 
term.  Referring  to  previous  chapters,  we  saw  that  the  reserve 
value  of  the  $10,000  ordinary  life  policy  at  age  35,  used  for 
illustrative  purposes,  was  $3,275.80  after  the  policy  has  been 
in  force  twenty  years,  while  for  the  same  policy  on  the  twenty- 
payment  plan  the  corresponding  reserve  value  was  $6,099.20. 
The  $10,000  twenty-year  endowment  policy,  however,  must, 
according  to  its  definition,  have  a  value  of  $10,000  at  the  end 
of  the  twenty-year  period,  and  the  difference  between  this 
value  and  the  values  noted  for  the  other  two  policies  must 
be  obtained  by  the  company  through  a  higher  premium. 

* 
PREMIUM  RATES  FOB  $1,000  ENDOWMENT  INSURANCE 


AGE 

10  YB. 
END 

15  YB. 

END 

20  YB. 

END 

25  YB. 

END 

30  YB. 

END 

35  YB. 

END 

40  YR. 

END 

45  YB. 

END 

WHOLE 
LIFE 
RATE. 

20 
25 
30 
35 
40 
45 

99.27 
99.90 
100.30 
100.90 
102.14 
103  58 

62.34 
62.70 
63.34 
64.20 
65.67 
67.70 

44.10 
44.82 
45.63 
46.70 
48.64 
51.45 

33.84 
34.67 
35.74 
37.0 

39.46 
43.05 

27.44 

28.38 
29.58 
31.44 
34.47 

38.85 

23.23 
24.35 
25.87 
28.15 
31.70 
36.90 

20.52 
21.80 
23.60 
26.30 
30.40 

18.60 
20.20 
22.40 
25.55 

16.60 
19.00 
21.80 
25.45 
30.25 
36.50 

50 
55 

106.45 
111  58 

71.75 

78  26 

56.55 
64  65 

49.30 
6005 

£7.65 

.... 

45.10 
56  50 

60 

12020 

89  10 

77  60 

72  70 

Functions  of  Endowment  Insurance. —  In 'the  past  endow- 
ment insurance  was  frequently  advertised  as  "investment 
insurance  "  without  making  proper  reference  to  the  cost  of 
the  insurance  protection.  But  as  Mr.  Dawson  states  in  con- 
sidering endowment  and  limited-payment  policies  as  an  in- 
vestment, "  a  life-insurance  policy,  at  the  best,  can  be  com- 
pared as  an  investment  with  other  investments,  not  accom- 


ENDOWMENT  INSURANCE  91 

parried  with  life  insurance,  only  when  a  proper  allowance  is 
made  for  the  cost  of  the  life  insurance.  ...  It  behooves  the 
company  as  a  matter  of  fairness  both  to  make  it  plain  that 
at  the  best  the  investment  is  good,  only  in  case  the  form  of 
the  protection  is  considered,  and  then  to  render  the  handicap 
as  little  as  possible  by  loading  endowment  and  limited-pay- 
ment life  premiums  justly."  x  The  real  function  of  endow- 
ment insurance  is  not  to  yield  a  large  investment  return  but 
rather  to  furnish  a  means  of  inculcating  the  saving  instinct 
and  to  afford  a  sure  method  of  providing  against  old  age  or 
some  other  specific  contingency  by  accumulating  a  definite 
sum  of  money  within  a  definite  time.  Briefly  stated,  en- 
dowment insurance  may  be  defended  under  proper  conditions 
because  of  its  usefulness  in  four  main  ways,  namely: 

1.  As  an  incentive  to  save. —  The  argument  most 
generally  advanced  in  favor  of  endowment  insurance  is  that 
it  constitutes  a  sure  method  for  systematic  saving  in  that  it 
provides  for  the  laying  away  of  a  moderate  sum  each  year 
with  a  view  to  having  all  the  accumulations  returned  in  one 
sum  at  the  end  of  a  fixed  period.  This  era  is  recognized 
as  a  particularly  extravagant  one,  and  vast  numbers  of  young 
men,  because  of  extravagant  habits,  never  save  a  dollar  al- 
though receiving  good  incomes.  For  such  persons  an  en- 
dowment policy  generally  turns  out  to  be  a  means  of  forcing 
thrift,  since  it  compels  them  to  do  that  which,  if  left  entirely 
to  their  own  option,  would  remain  undone.  By  requiring  the 
payment  of  specific  sums  at  regular  intervals  during  a  period 
of  years,  endowment  insurance  enables  many  to  save  a  sum 
worth  while,  without  being  conscious  of  the  sacrifice,  whereas 
haphazard  methods  of  saving  seldom  achieve  this  result. 
"  Such  a  policy,"  as  has  been  said,  "  gives  a  person  a  definite 
aim  —  he  must  save  just  so  much  every  year,  and  experi- 
ence soon  teaches  that  he  can  do  it  easily."  It  should  also 
be  emphasized  that  in  ever  so  many  instances  the  difference 
between  the  premium  on  an  endowment  policy  and  some 

*DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  231-234. 


92         THE  PKINCIPLES  OF  LIFE  INSURANCE 

other  kind  of  contract  requiring  a  smaller  payment  would 
not  be  saved  were  it  not  for  the  voluntarily  assumed  sacri- 
fice of  paying  the  higher  rate.  Endowment  insurance,  there- 
fore, as  it  concerns  those  who  find  it  difficult  to  save,  rep- 
resents a  means  of  utilizing  the  by-product  of  their  earnings 
—  the  small  sums  otherwise  wasted  in  needless  expenditures  — 
for  the  accumulation  of  a  competence.  And  even  assuming 
that  these  small  sums  are  not  wasted,  it  would  still  be  true 
that  in  probably  the  majority  of  instances,  they  would  be 
invested  injudiciously  and  would  be  subject  to  the  hazard  of 
business^  or  even  if  carefully  invested  would  be  withdrawn 
under  the  temptation  of  speculation  or  luxury. 

It  is  also  contended  by  many  that  endowment  policies 
maturing  in,  say,  twenty  years  afford  to  many  young  men, 
especially  if  they  labor  under  the  difficulty  of  not  being  able 
to  save  or  keep  their  savings,  the  advantage  of  yielding  a 
cash  capital  "  at  the  prime  of  life  when,  ripened  by  years 
of  experience,  they  can  use  it  to  the  best  advantage."  Strange 
as  it  may  seem  many  of  the  nation's  most  prominent  business 
men,  who  we  would  think  could  currently  use  all  spare  funds 
to  the  best  advantage  in  their  business,  have  publicly  em- 
phasized this  feature  of  endowment  insurance.  Only  a  few 
years  ago  one  of  the  leading  merchants  of  this  country  in 
addressing  a  meeting  of  life-insurance  agents  related  how 
he  had  been  induced  to  take  one  endowment  policy  after  an- 
other until  he  carried  a  huge  amount  of  this  type  of  insurance. 
He  explained  its  advantages  to  him  as  a  means  of  compulsory 
thrift,  of  accumulating  sums  little  by  little  until  a  large  fund 
existed,  and  expressed  his  belief  that  if  it  had  not  been  for 
the  sum  realized  upon  the  maturity  of  his  endowments  he 
might  never  have  erected  his  splendid  store. 

2.  As  a  means  of  providing  for  old  age. —  Endow- 
ment insurance,  if  the  term  is  so  selected  as  to  make  the 
policy  mature  at  an  age  like  60,  65,  or  70,  may  serve  as  an  ex- 
cellent method  of  accumulating  a  fund  for  support  in  old  age. 
Many  who  oppose  endowments  maturing  at  earlier  periods 
because  of  their  greater  cost  are  ardent  supporters  of  long- 


ENDOWMENT  INSURANCE  93 

term  endowments  maturing  at  an  age  when  a  man's  earning 
capacity  usually  ceases  and  when  he  naturally  expects  to 
retire  from  actual  work.  Statistics  show  that  less  than  one 
man  in  ten  succeeds  in  laying  up  a  competence  by  the  time 
this  age  is  reached.  Most  men  are  therefore  confronted  with 
two  contingencies:  (1)  an  untimely  death  may  leave  their 
families  unprotected,  and  (2)  in  case  of  survival  until  old 
age  they  may  lack  the  means  of  proper  support.  Both  of 
these  contingencies  may  conveniently  be  provided  against  by 
a  long-term  endowment.  If  death  should  occur  at  any  time 
during  the  term,  the  insurance  proceeds  revert  to  the  family; 
but  should  the  insured  survive  to  old  age,  when  the  need  of 
insurance  for  family  protection  has  largely  or  altogether  passed 
away,  he  will  himself  receive  the  proceeds  of  the  fund  which  his 
prudence  and  foresight  enabled  him  to  accumulate,  to  be 
used  for  his  own  support  and  comfort. 

In  this  connection  it  should  be  remembered  that  a  whole- 
life  policy,  based  on  the  American  table  of  mortality,  is  an 
endowment  at  age  96,  since  this  age  according  to  that  table 
is  considered  the  extreme  limit  of  life.  At  age  25  a  whole-life 
policy  is,  therefore,  an  endowment  policy  for  a  term  of  seventy- 
one  years.  Now  those  upholding  long-term  endowments  take 
the  position  that  it  is  most  illogical  to  choose  age  96  as  the 
age  when  the  insured  shall  have  completed  his  savings  fund 
under  the  policy,  and  that  it  accords  much  more  with  the  real 
needs  of  the  average  man  to  move  the  maturity  of  the  con- 
tract from  the  ridiculous  age  of  96  to  the  more  reasonable 
age  of  60  or  65,  when  the  need  for  insurance  protection  is 
usually  small  while  the  need  of  a  fund  for  comfortable  main- 
tenance in  old  age  is  usually  pressing.  Especially,  it  is 
argued,  should  this  change  to  an  earlier  date  of  maturity  be 
provided  when  the  difference  between  the  premium  on  an 
ordinary  life  policy  and  that  on  an  endowment  maturing 
at,  say,  65  is  so  small  that  its  payment  does  not  involve  any 
appreciable  sacrifice  and  would  in  all  probability  not  have 
been  saved  except  for  the  voluntary  determination  to  pay 
the  slightly  higher  premium.  Thus  at  age  25,  using  the 


94  THE  PRINCIPLES  OF  LIFE  INSURANCE 

aforementioned  rates,  the  premium  on  a  forty-year  endowment 
is  $21.80  as  compared  with  the  premium  of  $19.00  for  an  ordi- 
nary life  policy,  or  a  difference  of  $2.80.  As  regards  a  forty- 
five-year  endowment  maturing  at  age  70  the  difference  between 
the  two  premiums  charged  by  this  company  is  only  $1.20.  In 
other  words,  the  payment  of  this  slight  extra  sum  each  year 
during  the  forty-  or  forty-five-year  period  insures  the  payment 
of  the  full  amount  of  the  policy  in  case  of  survival  at  age 
60  or  70. 

3.  As  a  means  of  hedging  against  the  possibility  of 
the  saving  period  being  cut  short  by  death. —  Reference  has 
been  made  several  times  to  the  fact  that  the  saving  of  a 
competence  involves  the  time  necessary  to  save  and  that  life 
insurance  affords  the  only  known  method  of  protecting  a 
person  against  the  possibility,  owing  to  an  untimely  death, 
of  not  being  able  to  accumulate  the  desired  amount.  Were 
it  not  for  the  uncertainty  of  life  and  the  inability  of  most 
people  to  carry  out  their  resolution  to  adhere  to  a  definite 
plan  of  saving  the  accumulation  of  an  estate  could  readily  be 
accomplished  by  the  deposit  of  certain  sums  at  regular  in- 
tervals. But,  as  we  have  seen,  the  effort  to  save  a  fixed 
amount  is  confronted  by  two  dangers:  (1)  death  before  there 
has  been  time  to  save  the  desired  amount,  and  (2)  failure  of 
the  individual  to  continue  his  plan  of  saving  or  to  keep  intact 
what  may  already  have  been  accumulated. 

Endowment  insurance  seeks  to  protect  the  individual  from 
both  of  these  dangers.  Thus  let  us  assume  that  it  is 
the  purpose  of  a  person  aged  25  to  accumulate  $20,000  dur-- 
ing  the  next  forty  years.  The  accomplishment  of  this  pur- 
pose might  be  attempted  by  saving  a  certain  amount  periodi- 
cally for  investment  in  business,  securities,  etc.,  and  by  se- 
curing protection  against  the  possibility  of  the  saving  period 
being  cut  short  by  death,  through  the  purchase  of  term  or 
whole-life  insurance.  But  it  is  also  clear  that  the  result  can 
definitely  be  accomplished  by  the  purchase  of  a  $20,000  forty- 
year  endowment  maturing  at  age  65.  On  the  one  hand,  this 
policy  by  requiring  the  payment  of  the  premium  at  regular 


ENDOWMENT  INSURANCE  95 

intervals  will  tend  to  enforce  thrift  on  the  part  of  the  insured, 
and  will  place  accumulations  beyond  the  danger  of  loss  to 
which  private  investments  are  usually  subject.  On  the  other 
hand,  it  hedges  the  insured's  savings  fund  against  premature 
death.  In  explaining  the  nature  of  an  endowment  policy 
we  saw  that  it  can  be  regarded  as  a  combination  of  saving  and 
decreasing  term  insurance.  Thus  in  the  first  year  of  the 
contract  when  the  investment  portion  of  the  contract  is  small 
the  term  insurance  amounts  to  nearly  $20,000,  but  if  at  a 
particular  time  the  investment  accumulation  under  this  policy 
is  $3,000  the  insurance  protection  amounts  to  $17,000.  When 
the  investment  portion  equals  $19,000  the  insurance  portion 
is  for  only  $1,000;  likewise  when  the  accumulation  of  the 
$20,000  fund  is  completed  and  paid  at  age  65,  the  insurance 
portion  is  reduced  to  zero.  It  is  thus  seen  that  this  policy  as- 
sures an  estate  of  $20,000  and  protects  the  insured  from  the 
chief  danger  —  death  before  the  fund  reaches  the  desired 
amount  —  attaching  to  any  plan  of  saving  which  is  not 
hedged  with  a  life-insurance  policy.  This  function  of  en- 
dowment insurance  has  recently  been  presented  very  clearly 
by  Mr.  Albert  Linton,2  and  the  following  four  paragraphs 
of  his  excellent  address  are  herewith  reproduced: 

For  the  purpose  of  illustration,  consider  a  $1,000  "Endow- 
ment at  65,"  a  Forty-year  Endowment,  taken  on  the  life  of  a 
young  man  aged  25.  The  purpose  of  this  contract  is  to  pro- 
vide insurance  protection  during  the  years  of  active  manhood 
and  to  provide  support  for  the  insured  during  his  old  age. 
Under  this  contract  the  beneficiary  receives  the  face  of  the 
policy  upon  the  death  of  the  insured,  should  death  occur  before 
age  65.  If  the  insured  lives  to  age  65  —  the  age  when,  accord- 
ing to  statistics,  more  than  90  out  of  every  100  men  are  de- 
pendent—  he  himself  receives  the  full  amount  of  the  policy. 
It  may  be  mentioned  in  passing  that  according  to  the  experi- 
ence of  The  Provident  Life  and  Trust  Company,  66  out  of 
every  100  men  who  insure  at  age  25  do  live  to  the  age  of  65. 

2  LINTON,  M.  ALBERT,  "  The  Endowment  Policy."  An  address  de- 
livered at  the  Fourth  Annual  Convention  of  General  Agents  of  the 
Provident  Life  and  Trust  Company  of  Philadelphia,  January,  1915. 


96          THE  PKINCIPLES  OF  LIFE  INSURANCE 

The  first  step  in  our  analysis  is  to  determine  what  sum,  pay- 
able at  the  beginning  of  each  year,  will  accumulate  at  com- 
pound interest  to  $1,000  in  40  years.  As  the  contract  is  to 
extend  over  so  long  a  period,  we  assume  a  conservative  rate  of 
interest,  say  31/£  per  cent.,  and  find  that  the  required  sum  is 
$11.43.  In  other  words  $11.43  paid  at  the  beginning  of  each 
year,  together  with  3 1/2  per  cent,  interest  upon  accumulated 
funds,  will  produce  $1,000  at  the  end  of  40  years.  At  the  end 
of  10  years  the  accumulation  will  be  $139,  at  the  end  of  20 
years,  $334,  and  at  the  end  of  30  years,  $611.  If,  therefore, 
the  contract  were  merely  one  of  compound  interest  —  an  ordi- 
nary savings  fund  contract  —  the  amount  payable  should  death 
occur  within  the  40  years,  would  be  simply  the  accumulation 
of  principal  and  interest,  of  which  the  above  three  amounts 
are  examples. 

Suppose,  however,  we  devise  as  an  accompaniment  to  the 
above,  an  insurance  policy  under  which,  should  death  occur 
before  age  65,  the  amount  payable  will  be  the  amount  by  which 
the  accumulation  of  the  annual  payments  of  $11.43  falls  short 
of  $1,000.  For  example,  in  the  tenth  year  the  accumulation 
is  $139.  In  the  tenth  year,  therefore,  the  amount  of  insurance 
will  be  the  difference  between  $1,000  and  $139,  that  is,  $861. 
In  the  twentieth  year  it  will  be  $666,  in  the  thirtieth  year  $389, 
and  in  the  fortieth  year  zero.  Technically  speaking,  therefore, 
the  policy  that  we  are  devising  is  one  which  provides  for  a 
decreasing  term  insurance  covering  a  period  of  forty  years. 
Performing  the  actuarial  computation  on  the  basis  of  the  Amer- 
ican Table  of  Mortality,  with  interest  at  3x/£  per  cent.,  we  find 
that  the  uniform  annual  premium  for  this  policy  at  age  25  is 
$6.97. 

Therefore,  if  we  weld  this  insurance  contract  to  the  com- 
pound interest  contract  we  obtain  the  policy  which  we  have 
taken  as  our  illustration  —  the  policy  which  pays  the  full 
$1,000  if  the  young  man  of  25  lives  to  the  age  of  65,  or  at 
his  death,  if  it  occurs  before  age  65.  Adding  the  two  premi- 
ums $11.43  and  $6.97,  we  obtain  $18.40,  the  exact  American 
3l/2  per  cent,  net  premium  at  age  25  for  a  forty-year  endow- 
ment. We  have  thus,  by  employing  the  simple  conception  of 
a  savings  fund  and  of  an  insurance  policy  which  pays  certain 
stipulated  amounts  should  death  occur  within  a  given  period 
of  years,  constructed  the  ordinary  endowment  policy  and  com- 
puted the  premium  therefor.  We  have  learned  that  in  paying 


ENDOWMENT  INSURANCE  97 

an  endowment  premium,  a  part  of  that  premium  builds  up  a 
fund  which  will  mature  the  policy  at  the  expiration  of  the 
endowment  period,  and  another  portion  of  the  premium  pro- 
vides for  insurance  sufficient  to  make  up  the  amount  by  which 
the  accumulated  fund  falls  short  of  the  full  face  of  the  policy, 
if  death  occurs  before  the  fund  is  complete. 

4.  As  a  means  of  accumulating  a  fund  for  specific 
purposes. —  The  special  purposes  which  endowment  insurance 
may  be  made  to  serve  are  exceedingly  numerous,  as  a  few 
illustrations  will  indicate.  Thus,  the  credit  and  successful 
operation  of  many  business  firms  desiring  to  negotiate  a  bond 
issue  may  be  dependent  chiefly  upon  the  life  of  one  man 
whose  unexpected  death  may  so  endanger  the  success  of  the 
business  as  to  preclude  the  redemption  of  the  bonds  upon 
maturity.  But  this  contingency  we  have  seen  3  may  be  averted 
if  the  head  of  the  business  insures  his  life  for  an  amount  equal 
to  the  bond  •  issue  under  an  endowment  policy  which  will 
become  payable  at  the  same  time  that  the  bonds  mature. 
In  the  event  of  death  the  firm  receives  the  face  of  the  policy 
and  may  either  redeem  the  bonds  if  that  is  possible  and 
desirable,  or  may  set  aside  such  an  amount  of  the  policy  pro- 
ceeds as  will,  with  interest,  amount  to  the  face  of  the  bond 
issue  at  the  time  of  maturity  and  use  the  balance  for  the 
development  of  the  business.  In  case  of  survival  the  endow- 
ment policy  will  have  resulted  in  the  accumulation  of  a  sink- 
ing fund  year  by  year  which  will  be  just  sufficient  to  redeem 
the  bonds.  The  same  principle  might  also  be  applied  to  the 
liquidation  of  a  mortgage  on  a  home.  Furthermore,  endow- 
ment insurance  may  be  used  in  various  ways  by  an  employer 
as  a  means  of  binding  his  employees  to  himself  and  thus  in- 
creasing the  efficiency  and  loyalty  of  his  working  force.4  We 
have  also  seen  that  endowment  insurance  lends  itself  admir- 
ably to  the  accumulation  of  a  fund  for  the  benefit  of  such 
institutions  as  colleges,  churches,  hospitals,  etc.5 

3-  Pages  38  to  39  of  this  volume. 
*  Pages  39  to  40  of  this  volume, 
s  Pages  36  to  39  of  this  volume. 


98  THE  PRINCIPLES  OF  LIFE  INSURANCE 

But  in  addition  to  such  business  uses,  endowment  policies 
may  often  serve  some  special  family  purpose,  especially 
as  regards  the  making  of  proper  and  certain  provision  for 
starting  children  in  life.  It  is  to  accomplish  this  purpose 
in  the  most  convenient  manner  for  parents  or  guardians  that 
companies  issue  the  various  forms  of  "  children's  endow- 
ments "  already  enumerated.  By  means  of  such  policies 
small  savings,  which  would  otherwise  probably  be  wasted, 
may  be  accumulated  into  a  fund  to  be  used  for  educational 
purposes,  or  to  start  a  son  in  business,  or  to  provide  a  daugh- 
ter with  a  dowry  in  case  of  marriage. 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  "The  Business  of  Life  Insurance."  Life 
Insurance  as  an  Investment,  chap.  23,  New  York,  1906. 

LINTON,  M.  ALBERT,  "The  Endowment  Policy."  An  address 
delivered  at  the  Fourth  Annual  Convention  of  General 
Agents  of  the  Provident  Life  and  Trust  Company,  Janu- 
ary, 1915. 


CHAPTER  IX 
INSTALLMENT  POLICIES 

Any  of  the  usual  plans  of  insurance  may  assume  the  form 
of  a  so-called  installment  policy,  the  installment  feature 
merely  providing  that  the  proceeds  of  the  policy  at  death  or 
on  maturity  as  an  endowment  shall  be  paid  in  a  series  of  in- 
stallments, annually,  semi-annually,  quarterly  or  monthly,  in- 
stead of  in  one  lump  sum.  To  illustrate,  a  whole-life  policy 
may  stipulate  that  in  the  event  of  the  insured's  death  its 
face  value  of  $10,000  shall  be  payable  in  ten  annual  install- 
ments of  $1,000  each,  or  the  arrangement  may  be  for  fifteen 
payments  of  $666.67,  twenty  payments  of  $500,  twenty-five 
payments  of  $400,  etc.  Or  there  may  be  a  further  stipulation 
to  the  effect  that  after  the  company  has  paid  $1,000  at  the 
beginning  of  each  year  for  ten  years  if  the  beneficiary  be 
still  alive,  the  same  annual  payments  shall  be  continued  for 
that  amount  throughout  the  beneficiary's  lifetime.  Numerous 
special  arrangements,  however,  can  be  made  to  suit  almost  any 
set  of  conditions  which  the  insured  may  have  in  mind  when 
considering  the  purchase  of  such  a  policy. 

The  Fundamental  Purpose  of  Installment  Insurance. — 
The  primary  object  of  making  an  insurance  policy  payable 
in  installments  is  to  safeguard  the  beneficiary  against  the 
loss  of  the  proceeds.  As  has  been  said,  the  installment  plan 
serves  the  purpose  of  "  insuring  one's  insurance."  Few  bene- 
ficiaries under  life-insurance  policies,  and  this  is  especially 
true  of  women,  possess  the  necessary  business  experience  so 
to  invest  and  manage  a  large  sum  of  money  as  to  yield  a 
constant  and  adequate  income.  Very  frequently,  too,  the  sud- 
den receipt  of  a  large  lump  sum  payment  means  little  more 
to  the  beneficiary  than  abundance  of  money  for  unnecessary 

99 


100        THE  PRINCIPLES  OF  LIFE  INSURANCE 

expenditures  with  the  result  that  the  present  is  thoughtlessly 
made  the  period  of  luxurious  living  at  the  risk  of  experienc- 
ing actual  want  in  the  future.  For  these  reasons  the  payment 
of  a  policy  in  a  single  sum  is  apt  to  defeat  the  very  purpose 
for  which  the  insurance  was  originally  taken,  namely,  the 
absolute  protection  of  the  beneficiary.  Payment  in  install- 
ments, on  the  contrary,  safeguards  the  beneficiary  against  the 
loss  of  insurance  protection  by  extravagance,  bad  advice  or 
poor  investment. 

The  underlying  purpose  of  life  insurance  is  the  protection 
of  the  family,  and  where  a  wife,  children,  or  other  dependents 
are  named  as  beneficiaries,  it  is  fundamentally  important  that 
the  real  purpose  of  the  policy,  namely,  their  protection, 
should  be  absolutely  secured  by  properly  safeguarding  the 
proceeds  of  the  policy  upon  its  maturity.  It  is  stated  on 
good  authority  that  about  sixty  per  cent,  of  the  insurance 
funds  left  to  beneficiaries  is  lost  by  them  through  bad  invest- 
ment or  needless  expediture  within  six  years  following  the 
death  of  the  insured.  This  experience  is  also  true  of  other 
funds  left  to  the  beneficiary.  On  every  hand  we  can  point 
to  examples  illustrating  how  easily  and  frequently  the  compe- 
tence which  a  husband  or  father  has  provided  through  sav- 
ing or  insurance  is  lost  or  foolishly  spent  by  the  heir  or  bene- 
ficiary. Modern  "income  policies,"  especially  where  the  cir- 
cumstances justify  the  use  of  the  continuous  income  feature, 
are  a  guarantee,  as  we  shall  see,  against  such  a  calamitous  con- 
tingency. 

Ordinary  Installment  Policies. —  Having  stated  the  gen- 
eral purpose  of  installment  insurance,  we  may  next  examine  the 
several  methods  of  applying  the  principle  in  actual  practice. 
One  plan,  as  already  noted,  consists  in  paying  the  proceeds  of 
a  $1,000  policy  in  a  definite  number  of  installments,  such  as 
ten  installments  of  $100  each,  fifteen  of  $66.67,  twenty  of 
$50,  etc.  The  advantage  of  this  plan,  as  compared  with  an 
ordinary  life  policy  payable  in  one  sum,  is  twofold.  Not 
only  does  the  policy  spread  the  payments  over  a  number  of 
years  and  thus  protect  the  beneficiary  against  the  loss  of  the 


INSTALLMENT  £pL*QIES  101 


principal,  but  its  premium,  in  '.prcptaftip&J  to,'  tj\o  f  uy  of  the 
policy,  is  also  smaller. 

To  understand  the  nature  of  this  policy  it  is  only  necessary 
to  ascertain  the  discounted  value  of  the  installments  at  an 
assumed  rate  of  interest.  If  the  rate  of  interest  used  by  the 
company  in  its  rate  computations  be  3^  per  cent.,  it  must 
have  on  hand  at  the  death  of  the  insured  $860.77  in  order  to 
pay  $1,000  in  ten  annual  installments  of  $100  each,  the  first 
installment  being  paid  at  death.  If  the  sum  is  to  be  paid 
in  twenty  installments  of  $50  each,  the  discounted  value  of 
the  installments  at  S1/^  per  cent,  is  $735.49.  It  is  only  on 
this  commuted  value  of  the  installments  (the  real  amount 
of  the  insurance),  and  not  on  $1,000,  that  the  company  needs 
to  charge  premiums.  In  other  words,  the  lower  premium 
on  this  policy  is  accounted  for  by  the  fact  that  the  interest 
accumulation  at  the  assumed  rate  which  the  company  makes 
on  the  proceeds  of  the  policy  which  it  holds  following  the 
death  of  the  insured  is  made  available  during  the  insured's 
lifetime  in  the  form  of  a  reduced  annual  premium.  The 
policy,  however,  may  be  written  at  the  regular  ordinary  life 
rates,  i.  e.  for  insurance  amounting  to  $1,000  at  maturity. 
In  that  case  the  interest  earned  on  the  funds  held  by  the  com- 
pany will  be  used  to  increase  the  size  of  the  installments, 
which,  in  the  case  of  the  ten-installment  plan  (assuming  3% 
per  cent,  interest)  will  now  amount  to  $116.18  instead  of 
$100,  and  in  case  twenty  installments  are  paid,  to  $67.98  in- 
stead of  $50.  But  whatever  the  plan  used,  ordinary  install- 
ment policies  still  have  the  objection  that  the  beneficiary  may 
outlive  the  installment  period  by  many  years  and  be  without 
the  steady  income  to  which  she  has  become  accustomed.  This 
situation  is  particularly  serious  when  the  age  and  physical 
condition  of  the  beneficiary,  at  the  time  the  installments  cease, 
is  such  as  to  preclude  the  earning  of  a  livelihood. 

Survivorship-Annuity  Policies.1—  Such  policies  provide 
that  if  the  beneficiary  should  outlive  the  insured  she  will 
receive  an  annuity  during  her  lifetime,  the  policy,  however, 
expiring  and  the  premiums  being  forfeited  in  case  the  insured 


102          THE  PRINCIPLES  OF  LIFE  INSURANCE 

should  Qi:t> jye  tKe]  jberje^oiary.  As  compared  with  the  ordi- 
nary installment  pc-frcy',  this  contract  does  not  promise  the 
payment  of  a  definite  number  of  installments.  Instead,  it 
agrees  to  pay  an  annuity  to  the  beneficiary  only  during  the 
years  that  she  may  survive  the  insured.  Yet  in  doing  this 
the  policy  overcomes  the  objection,  noted  in  connection  with 
the  ordinary  installment  plan,  that  the  beneficiary  may  sur- 
vive the  installment  period  and  thus  be  without  an  income. 

Although  popular  among  persons  familiar  with  the  mathe- 
matics of  life  insurance,  this  policy  has  never  appealed  to 
the  public,  partly  because  nothing  is  realized  in  case  the  bene- 
ficiary should  die  before  the  insured,  and  partly  because  the 
amount  paid  to  the  beneficiary  in  case  she  should  outlive  the 
insured  is  indefinite  and  may  be  very  small.  The  first  ob- 
jection, however,  may  be  eliminated  by  having  the  policy 
provide  for  the  return  of  all  premiums  paid  in  case  the  in- 
sured shall  survive  the  beneficiary. 

Continuous-Installment  Policies. —  The  shortcomings  of 
both  of  the  preceding  plans  are  remedied  by  the  continuous- 
installment  policy,  which  promises  a  fixed  number  of  install- 
ments certain,  to  be  followed  by  the  same  installment  for  as 
many  more  years  as  the  beneficiary  may  outlive  the  fixed  in- 
stallment period.  To  illustrate,  the  policy  may  provide  for 
the  payment  of  annual  installments  for  twenty  years,  and 
if  the  beneficiary  be  still  alive  at  the  end  of  the  twenty  years, 
for  the  continuation  of  the  payments  during  the  whole  of  her 
subsequent  lifetime.  It  is  thus  impossible  for  the  beneficiary 
to  be  left  without  an  income  as  may  be  the  case  under  an 
ordinary  installment  policy.  Furthermore,  the  policy  over- 
comes the  principal  objection  to  the  survivorship  annuity  be- 
cause, should  the  beneficiary  not  survive  the  insured  many 
years,  the  installments  will  nevertheless  be  paid  after  her 
death  until  twenty  annual  payments  have  been  completed. 
Unless  the  insured  has  expressly  extended  the  privilege  to 
the  beneficiary,  the  installments  (and  this  is  also  true  of  the 
ordinary  installment  policy)  cannot  be  commuted  for  a  lump 
sum  payment,  since  to  do  so  would  defeat  the  chief  object  of 


INSTALLMENT  POLICIES  103 

the  policy,  viz.,  the  securing  of  a  definite  income  to  the  bene- 
ficiary. Should  the  beneficiary  die  before  the  insured  and 
while  the  policy  is  in  force,  future  premiums  will  be  reduced 
to  the  corresponding  rate  for  an  ordinary  installment  policy. 

Various  special  applications  of  the  continuous-installment 
principle  are  possible.  Thus  two  or  more  persons  may  be 
named  as  beneficiaries  under  the  same  policy.  Should  one 
of  them  die  after  receiving  the  full  number  of  installments 
certain,  the  installments  relating  to  such  beneficiary  will 
then  cease.  But  in  case  of  death  before  the  fixed  number 
of  installments  have  been  paid,  the  remaining  unpaid  in- 
stallments will  pass  as  they  come  due  to  the  surviving  bene- 
ficiary or  beneficiaries.  Again,  the  insured  may  feel  that  it 
would  be  financially  imprudent  to  have  his  beneficiary  receive 
at  one  time  as  much  as  is  involved  in  a  full  annual  installment. 
If  desired,  therefore,  the  companies  will  make  the  payments 
in  proportionate  semi-annual,  quarterly  or  monthly  install- 
ments. The  continuous-installment  feature  may  also  be  ap- 
plied to  an  endowment  policy.  In  the  event  of  death  during 
the  endowment  period,  the  insurance  is  payable  in  equal  an- 
nual installments  for  a  stipulated  period  like  twenty  years 
and  as  long  thereafter  as  the  beneficiary  may  survive.  Like- 
wise, in  the  event  of  the  insured' s  survival  of  the  endowment 
period,  the  amount  of  the  policy  will  be  payable  in  twenty  an- 
nual installments  certain  to  himself  or  a  designated  beneficiary, 
to  be  followed  by  similar  installments  throughout  the  subse- 
quent lifetime  of  either  the  insured  or  the  beneficiary  nom- 
inated at  the  time  the  endowment  matures.  Under  this  plan 
the  amount  of  the  installment  will  depend  upon  the  ages  'of 
the  insured  and  beneficiary  at  the  maturity  of  the  endowment. 

Advantages  of  the  Continuous-Installment  Plan. —  Care- 
ful consideration  of  the  continuous-installment  feature  in 
life  insurance  will  convince  one  of  its  advantages  as  com- 
pared with  other  forms  of  settlement  and  with  other  methods 
of  investment  as  regards  reliability,  economy  and  convenience. 
In  view  of  the  financial  stability  of  our  well-established  com- 
panies, the  plan  furnishes  an  absolutely  certain  income 


104        THE  PK1NCIPLES  OF  LIFE  INSURANCE 

for  dependents.  Not  only  does  it  guarantee  an  income  to  the 
beneficiary  throughout  life,  but,  owing  to  the  installments 
certain,  the  income  continues  sufficiently  long  to  secure  the 
proper  education  and  maintenance  of  the  children.  It  also 
eliminates  all  details  of  administration  on  the  part  of  the 
insured  or  beneficiary  and  secures  them  against  the  hazards 
and  expense  connected  with  the  investment  and  management 
of  an  estate.  To  quote  an  excellent  statement  of  its  func- 
tions : 

This  policy  may  be  made  to  provide  support  for  the  widow 
during  the  remainder  of  her  days;  to  educate  the  children;  to 
give  independence  and  protection  to  the  unmarried  daughters. 
In  a  word  it  may  be  made  to  provide  unfailing  support  for  any 
or  every  dependent.  This  policy  appeals  to  men  in  every  rank 
of  life;  to  the  man  of  limited  means  who  is  unable  to  pur- 
chase a  home,  because  a  minimum  policy  may  pay  the  widow's 
rent  for  life;  to  the  man  of  moderate  means  whose  family  is 
accustomed  to  use  a  larger  income  and  to  the  man  of  affluence 
whose  family  is  trained  to  spend  a  munificent  allowance  be- 
cause by  means  of  an  adequate  policy  each  may  solve  the  prob- 
lem of  how  to  guarantee  the  continuance  of  the  accustomed 
family  income  after  his  death. 

The  foregoing  advantages  become  especially  apparent  when 
we  reflect  that  the  premium  on  a  continuous-installment,  policy 
is  considerably  below  that  charged  on  a  policy  of  a  like  amount 
when  payable  in  one  sum.  An  examination  of  the  rates 
furnished  on  the  opposite  page  (being  those  charged  by  the 
company  used  for  illustrative  purposes  in  preceding  chapters) 
will  show,  for  example,  that  when  the  ages  of  the  insured 
and  beneficiary  are  respectively  25  and  20  the  annual  premium 
on  a  whole-life  policy  payable  in  installments  of  $50  for  twenty 
years  certain  and  thereafter  during  the  lifetime  of  the  bene- 
ficiary is  only  $17.64  as  compared  with  a  premium  of  $19.00 
for  a  $1,000  ordinary  life  .policy  at  age  25  payable  in  one 
sum.  As  the  age  of  the  beneficiary  increases,  as  compared 
with  that  of  the  insured,  it  will  be  observed  that  the  premium 
on  the  continuous-installment  policy  decreases,  the  rate,  for 


INSTALLMENT  POLICIES 


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106          THE  PRINCIPLES  OF  LIFE  INSURANCE 

example,  being  only  $15.44,  when  the  ages  of  the  insured  and 
beneficiary  are  respectively  25  and  45,  as  compared  with  the 
$19.00  rate  on  an  ordinary  life  policy.  The  reason  for  this 
difference  in  the  rates  has  already  been  explained  as  far  as 
the  installments  certain  are  concerned.  The  continuous-in- 
stallment feature  is  an  addition  to  the  ordinary  installment 
part  of  the  contract  and  must,  of  course,  be  charged  for  in 
order  to  enable  the  company  to  meet  its  liability  for  those 
installments  which  it  may  have  to  pay  to  the  beneficiary  in 
case  she  should  outlive  the  insured  by  more  than  twenty 
years.  But  this  extra  cost  is  slight  because  it  is  apparent 
that  where  the  ages  of  the  insured  and  beneficiary  are  about 
the  same,  and  especially  where  the  beneficiary  is  much  older 
than  the  insured,  there  will  not  be  on  the  average  many 
instances  where  the  beneficiary  will  outlive  the  insured  by 
more  than  twenty  years;  furthermore,  as  regards  the  limited 
number  of  cases  where  the  continuous  feature  goes  into  opera- 
tion, the  number  of  installments  payable  will  not  average  high. 
Guaranteed  Interest  Bonds. —  Another  method  of  provid- 
ing a  permanent  and  certain  income  to  the  beneficiary  or  the 
insured  consists  in  the  issue  of  " income "  or  "guaranteed 
interest  bonds  "  upon  the  death  of  the  insured  or  the  comple- 
tion of  the  endowment  period.  If  the  rate  of  interest  as- 
sumed for  the  mathematical  computation  of  rates  is  3  per 
cent.,  the  cpmpany  can,  if  it  is  willing  to  guarantee  this 
rate,  allow  the  proceeds  of  the  policy  to  be  left  with  it  during 
the  lifetime  of  one  or  more  beneficiaries,  and  in  the  mean- 
time pay  annually  the  agreed  rate  of  interest.  The  plan  sim- 
ply amounts  to  allowing  the  proceeds  of  the  policy  to  stand  out 
at  interest,  the  principal  to  be  paid  by  the  company  upon  the 
death  of  the  beneficiary  or  beneficiaries.  Sometimes  the 
policies  provide  that  the  annual  return  will  be  increased  by 
the  annual  dividends  apportioned  by  the  company,  and  that, 
in  the  absence  of  restrictions  by  the  insured,  the  beneficiary, 
at  any  time  an  interest  payment  is  due,  may  withdraw  the 
amount  so  left  with  the  company.  Another  variation  of  the 
plan  consists  in  making  the  rate  of  interest  on  the  bond 


INSTALLMENT  POLICIES  107 

considerably  higher  than  the  company  assumes  it  can  earn. 
To  pay  the  higher  rate,  however,  the  company  charges  a 
premium  for  an  additional  amount  of  insurance  sufficiently 
large  to  furnish  the  extra  return. 


CHAPTEE  X 
OTHER  LEADING  TYPES  OF  CONTRACTS 

JOINT-LIFE  POLICIES 

Under  an  ordinary  joint-life  policy  two  or  more  persons 
are  insured  in  favor  of  each  other,  the  policy  terminating 
and  being  payable  when  the  first  death  amongst  them  occurs. 
Such  a  policy  may  be  issued  in  connection  with  any  of  the 
forms  of  insurance  previously  discussed,  viz,  term  insurance, 
whole-life  insurance,  endowment  insurance,  etc.,  and  the 
premium  may  be  paid  on  either  the  continuous-payment  or 
limited-payment  plan.  If  -issued  on  the  endowment  plan, 
the  company  agrees  not  only  to  pay  the  policy  in  the  event  of 
the  death  of  one  of  the  parties  to  the  contract  during  the 
endowment  period,  but  also  at  the  end  of  the  period  if  all 
the  parties  to  the  contract  are  then  alive. 

Premiums  on  Joint-Life  Policies. —  The  principles  under- 
lying the  computation  of  rates  on  joint-life  policies  are  the 
same  as  those  used  in  computing  the  rates  on  policies  cover- 
ing single  lives,  with  the  exception  that  the  theory  of  prob- 
ability of  death  must  be  applied  with  reference  to  two  or 
more  lives,  instead  of  one,  in  order  to  determine  the  lia- 
bility of  the  company.  Manifestly,  since  the  company  agrees 
to  pay  the  policy  as  soon  as  one  of  two  (or  more)  persons 
dies,  the  premium  on  a  joint-life  policy  is  higher  per  $1,000 
of  insurance  than  the  rate  on  a  policy  on  either  life  alone. 
On  the  other  hand,  it  is  apparent,  that  the  premium  on  a 
joint-life  policy  covering  two  persons  is  less  than  the  sum  of 
the  premiums  on  the  policies  insuring  the  two  lives  separately. 
On  the  two  separate  policies  the  company's  liability  is  greater 
because  each  will  involve  the  payment  of  its  face  value  upon 
the  death  of  the  insured,  while  under  the  joint-life  policy 
only  one  claim  will  be  paid  —  i.e.  upon  the  happening  of 

108 


OTHER  LEADING  TYPES  OF  CONTRACTS      108 


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110          THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  first  death  —  and  the  policy  will  terminate  at  that  time. 

An  examination  of  the  rates  on  the  preceding  page  (being 
those  charged  by  a  certain  company)  shows,  for  example,  that 
where  the  ages  of  the  two  persons  insured  are  25  and  30  re- 
spectively, the  rate  for  the  joint  whole-life  policy  is  $32.16, 
while  the  sum  of  the  rates  on  two  whole-life  policies  insuring 
the  two  lives  separately,  viz,  $19.00  at  age  25  and  $21.80  at  age 
30,  is  $40.80.  It  will  also  be  noted  that  the  inclusion  of  an 
older  person  in  the  insured  group  will  materially  increase  the 
premium  on  a  joint-life  policy.  Where  the  two  persons  in- 
sured, for  example,  are  aged  25  and  60  respectively,  the  joint- 
life  premium  will  have  increased  to  $79.32,  yet  this  rate  is 
$12.38  less  than  the  sum  of  the  rates  ($19.00  at  age  25  plus 
$72.70  at  age  60)  on  two  policies  taken  out  separately  on  these 
lives. 

The  Use  of  a  Joint-Life  Policy  Compared  with  the  Use 
of  Separate  Policies  on  the  Same  Lives. —  Joint-life  policies 
may  be  taken  by  husband  and  wife  in  favor  of  each  other  or 
for  the  protection  of  their  children.  Should  the  husband 
die  first,  his  wife  and  children  will  be  properly  provided  for, 
while  if  the  wife  dies  first  the  proceeds  of  the  policy  will 
also  prove  a  substantial  help  to  the  family.  Again,  such  poli- 
cies may  appeal  to  husband  and  wife  who  are  receiving  a 
joint  income.  The  most  frequent  use  of  such  policies,  how- 
ever, is  for  the  protection  of  a  firm  against  the  death  of 
one  of  its  partners.  For  this  reason  joint-life  insurance  is 
frequently  referred  to  as  "partnership  insurance,"  although 
that  term,  it  should  be  noted,  has  a  broader  meaning  since 
it  may  also  refer  to  the  insurance  of  the  several  partners  under 
separate  policies  for  the  benefit  of  the  firm.  Either  plan,  it 
is  clear,  serves  as  a  means  of  protecting  the  business  against 
the  withdrawal  of  capital  and  the  loss  of  valuable  experience 
that  usually  results  from  the  death  of  a  partner,  of  strength- 
ening the  credit  of  the  firm  at  a  time  when  lack  of  capital 
is  most  likely  to  prove  disastrous,  and  -of  making  possible 
the  retention  of  the  control  and  management  of  the  business 
by  the  surviving  partner  or  partners. 


OTHER  LEADING  TYPES  OF  CONTRACTS        111 

Where  the  firm  consists  of  only  two  partners  the  joint-life 
policy  may  appeal  as  a  means  of  protecting  one  partner  against 
the  death  of  the  other,  especially  since  the  premium  is  lower 
than  the  sum  of  the  two  premiums  required  if  both  insured 
themselves  under  separate  policies  for  the  benefit  of  the  other. 
The  general  tendency,  however,  seems  to  be  towards  the  use 
of  individual  policies  rather  than  joint-life  contracts.  This 
is  especially  true  where  the  partnership  consists  of  more  than 
two  partners,  because  under  such  circumstances  there  is  a 
much  greater  possibility  of  some  one  of  the  members  desiring 
to  withdraw  from  the  firm,  thus  frequently  necessitating  an 
intricate  settlement  as  regards  the  joint-life  policy.  Such 
complications,  it  is  argued,  can  best  be  avoided  by  issuing  in- 
dividual policies  on  the  lives  of  the  members  of  a  firm  at  the 
regular  rates.  Under  this  plan  the  death  of  any  partner  . 
will  cause  his  insurance  to  be  paid  to  the  firm,  the  other 
policies  continuing  in  force  as  before  for  the  benefit  of  the 
business.  But  in  the  event  of  the  dissolution  of  the  partner- 
ship, or  in  case  the  need  for  insurance  ends,  the  policy  may 
either  be  surrendered  for  its  cash  value,  or  be  transferred, 
upon  the  payment  of  a  proper  consideration,  to  the  insured 
who  may  then  continue  it  as  his  own  insurance  for  the  protec- 
tion of  his  family  or  estate. 

ANNUITIES 

In  character  the  annuity  is  the  opposite  of  insurance  against 
death,  and  may  be  defined  as  a  contract  whereby  for  a  cash  con- 
sideration one  party  (the  insurer)  agrees  to  pay  the  other  (the 
annuitant)  a  stipulated  sum  (the  annuity)  throughout  life, 
or  during  life  within  a  fixed  term,  either  annually,  semi-an- 
nually,  or  quarterly.  Its  purpose  it  is  seen  is  to  protect 
against  a  hazard  —  the  outliving  of  one's  income  —  which  is 
just  the  opposite  of  that  confronting  a  person  who  desires 
life  insurance  as  protection  against  the  loss  of  income  through 
premature  death.  Technically,  however,  the  two  types  of 
contracts  are  closely  related  to  each  other,  since  the  cost  of 
both  is  computed  on  the  basis  of  similar  data  and  principles. 


112        THE  PKINCIPLES  OF  LIFE  INSURANCE 

Immediate  Annuities  and  Their  Advantages. —  The  form 
of  annuity  most  commonly  used  is  the  so-called  "ordinary 
life "  or  "  immediate "  annuity.  This  is  purchased  with  a 
single  cash  sum  in  advance  and  guarantees  the  payment  of  a 
stipulated  sum,  annually,  semi-annually  or  quarterly  during 
the  lifetime  of  the  annuitant,  with  the  understanding  that 
upon  his  death  such  payments  shall  cease  and  the  consideration 
paid  for  the  annuity  be  regarded  as  fully  earned.  Owing  to 
the  greater  longevity  of  female  annuitants  the  cost  of  an- 
nuities for  women  is  slightly  higher  than  for  men.  Annui- 
ties of  this  kind  prove  serviceable  to  that  considerable  class  of 
men  and  women  whose  only  means  of  support  is  an  estate  so 
small  as  to  yield  an  altogether  inadequate  income,  and  who 
have  no  one  to  whom  they  care  to  transfer  this  estate  in  the 
event  of  death.  For  purposes  of  illustration  let  us  assume 
that  a  man  aged  65  possesses  $15,000  and  that  this  fund 
constitutes  his  sole  means  of  support.  If  invested  in  the  most 
careful  manner,  let  us  say  in  gilt-edged  bonds,  so  as  to  avoid 
any  danger  of  loss,  the  current  rate  of  return  will  probably 
not  exceed  four  per  cent.,  thus  limiting  the  owner's  income 
to  $600  a  year.  This  amount  may  prove  woefully  inadequate 
for  proper  support  during  old  age;  yet  the  owner,  not  know- 
ing how  long  he  may  live,  does  not  feel  that  he  can  afford 
to  take  a  portion  of  his  principal  each  year  for  living  ex- 
penses, because  impairment  of  the  principal  means  a  cor- 
responding reduction  in  the  income.  As  previously  stated, 
"  The  danger  confronting  this  man  is  just  the  opposite  of 
that  facing  the  man  who  wants  insurance  against  death. 
The  latter  wants  insurance  because  he  does  not  know  how 
long  he  may  live,  while  the  former  is  confronted  with  the 
danger  of  living  too  long,  i.e.  of  outliving  his  income." 

The  difficulty  referred  to  can,  however,  be  remedied  by  re- 
investing the  $15,000  in  a  life  annuity.  By  doing  this  a 
definite  and  much  larger  income,  guaranteed  for  the  whole 
of  life,  can  be  obtained.  In  the  event  of  early  death,  it  is 
true,  the  purchase  price  of  the  annuity  will  not  be  returned,  but 
the  necessity  for  an  income  will  have  ceased.  On  the  contrary, 


OTHER  LEADING  TYPES  OF  CONTRACTS      113 

in  case  of  long  life  the  return  will  not  only  be  absolutely  certain 
and  regular  from  year  to  year  but  also  very  remunerative. 
To  quote  the  rates  of  a  certain  company,  our  owner  of  the 
$15,000  fund  may  use  the  same  as  a  cash  payment  for  an 
annuity  at  age  65  which  will  yield  him  an  income  through- 
out life  of  $1,538.10,  instead  of  $600,  per  annum,  or  10 % 
per  cent,  as  compared  with  the  current  rate  of  4  per  cent. 
As  the  age  of  the  annuitant  when  purchasing  the  annuity 
increases,  the  greater  will  be  the  return,  amounting  in  this 
company  to  nearly  12%  per  cent,  at  age  70  and  to  nearly 
15%  per  cent,  at  age  75,  the  last  return  being  nearly  four 
times  that  secured  at  the  current  rate  of  4  per  cent.  At  the 
same  ages  the  corresponding  returns  of  an  annuity  in  this 
company  on  the  life  of  a  woman  will  be  9%  per  cent.,  11% 
per  cent.,  and  13%  jper  cent.  Should  the  annuitant  desire  a 
definite  income  such  as  $100,  $500,  $1,000,  or  any  other 
round  amount,  the  companies  will  issue  the  annuity  on  that 
basis.  Thus  if  a  man  aged  65  desires  an  annuity  of  $1,500, 
he  is  permitted  to  deposit  the  necessary  capital  with  the  com- 
pany whose  rates  are  being  used  for  illustrative  purposes, 
viz,  $14,628.  These  large  returns  on  annuities  issued  at  the 
later  years  of  life  are  possible  (1)  because  the  death  rate 
following  ages  65,  70,  or  75  is  very  high  and  (2)  because,  in 
accordance  with  the  meaning  of  an  annuity,  all  payments 
will  cease  upon  death  and  the  unused  portion  of  the  purchase 
price  of  the  annuity  will  redound  to  the  benefit  of  those 
annuitants  still  living.  As  will  be  explained  later,  the  rates 
for  annuities  are  computed  in  the  same  manner  as  are  those 
for  insurance  policies,  and  annuity  benefits  may,  therefore,  be 
granted  by  the  company  with  equal  certainty. 

With  reference  to  the  classes  of  persons  to  whom  an  annuity 
may  appeal  should  be  mentioned  unmarried  men  and  women 
who  will  leave  no  dependents  and  who  desire  to  make  the  best 
provision  for  their  own  comfort  during  life,  widows  or  widow- 
ers without  children,  parents  whose  children  are  comfortably 
provided  for,  and  employers  who  may  wish  to  provide  ade- 
quately for  old  and  deserving  servants.  For  persons  in  these 


114          THE  PRINCIPLES  OF  LIFE  INSURANCE 

classes  an  annuity  furnishes  a  definite  life  income  which  is 
free  from  the  care  arid  danger  of  loss  attaching  to  the  ordinary 
methods  of  investing  money.  The  arrangement,  however, 
does  not  as  a  rule  appeal  to  those  who  have  children,  especially 
if  they  are  in  need  of  support  or  if  it  is  desired  to  leave  them 
an  inheritance,  because  the  only  benefit  derived  from  an 
annuity  is  the  income  return  during  life. 

Other  Types  of  Annuities. —  Just  as  life  insurance  may  be 
offered  under  various  types  of  contracts,  so  annuities  may  as- 
sume a  variety  of  forms  to  cover  the  needs  of  different  per- 
sons. Special  attention  should  be  called  to  the  following : 

Annuity  contract  guaranteeing  a  minimum  number 
of  annuity  payments. — Such  contracts  may  provide,  for  ex- 
ample, that  in  return  for  a  given  cash  payment. an  annuity 
of  say  $100  shall  be  paid  during  the  lifetime  of  a  designated 
person,  but  that  irrespective  of  the  death  or  survival  of  said 
person,  at  least  ten  payments  must  be  made.  It  should  also 
be  noted  that  an  immediate  annuity  may  be  made  to  provide 
that  in  the  event  of  death  the  company  shall  pay  "  a  pro- 
portion of  the  annual  sum,  based  upon  the  number  of  months 
which  have  elapsed  since  the  last  annuity  was  paid."  Thus, 
if  the  annual  annuity  payment  is  $1,200  and  if  death  should 
occur  ten  months  following  the  last  payment,  the  company 
will  pay  $1,000  or  ten-twelfths  of  the  annual  payment.  This 
arrangement,  it  is  argued,  "  allows  the  annuitant  to  live  up 
to  his  income,  for  should  his  death  occur  shortly  after  the 
regular  annuity  payment  he  would  have  on  hand  the  expended 
balance  of  his  annuity,  while,  should  his  death  occur  ten  or 
eleven  months  after  the  regular  annuity  payment,  the  pro 
rata  paid  by  the  company  would  aid  in  extinguishing  such 
debts  as  would  otherwise  remain  unpaid/' 

'  Deferred  annuities. —  As  the  name  suggests,  a  de- 
ferred annuity  is  not  payable  to  the  purchaser  immediately,  but 
only  upon  his  surviving  a  stipulated  period.  To  illustrate,  a 
man  35  years  old  may  decide  to  save  a  portion  of  his  earnings 
each  year  with  a  view  to  providing  for  himself  twenty  years 
from  date  an  annual  income  of  $1,000  payable  in  semi-annual 


OTHER  LEADING  TYPES  OF  CONTRACTS        115 

. 

installments  of  $500  each,  the  first  installment  of  $500  to  be. 
paid  when  he  becomes  55^/2  years  old.  This  he  can  do  by 
paying  to  the  company,  whose  rates  were  previously  quoted, 
$429  a  year  for  twenty  years. 

Such  an  annuity  may  be  paid  for  in  a  single  sum,  on  the  lim- 
ited payment  plan,  or  by  yearly  premiums  throughout  the  pe- 
riod of  deferment.  It  may  appeal  to  persons  who  wish  to 
utilize  their  productive  years  to  accumulate  a  fund  for  the 
purchase  of  an  annuity  at  an  age  when  their  income-earning 
capacity  will  have  declined  or  ceased.  There  is  usually  no 
refund  of  the  premiums  that  may  have  been  paid  in  case  the 
annuitant  should  die  before  the  first  installment  of  the  de- 
ferred annuity  becomes  payable.  Occasionally,  however,  de- 
ferred annuities  are  made  to  provide  for  a  return  to  the 
annuitant's  executors,  administrators,  or  assigns  of  all  premi- 
ums in  the  event  of  his  death  before  the  annuity  payments 
begin. 

Last-survivor  annuities. —  Annuities  may  also  be 
issued  upon  the  lives  of  two  persons,  the  payments  to  be 
made  to  them  jointly  while  they  are  both  alive,  and  to 
continue  for  the  full  amount  during  the  lifetime  of  the  sur- 
vivor. While  this  plan  may  be  applied  to  three  or  more 
lives,  such  instances  are  very  few  as  compared  with  two- 
life  annuities.  This  plan  may  prove  very  advantageous  to 
two  sisters,  or  to  a  husband  and  wife  who  have  no  children 
or  whose  children  are  financially  prosperous,  as  a  means  of 
providing  an  adequate  and  regular  income  not  only  during 
their  joint  lifetime  but  also  during  the  lifetime  of  the  sur- 
vivor of  the  two.  Thus  a  husband  aged  55  and  his  wife  aged 
50  may  have  an  annual  income  of  $1,000,  for  as  long  as  either 
may  live,  guaranteed  to  them  by  the  aforementioned  company 
upon  the  payment  of  $18,337. 


PAET  II      . 
THE  SCIENCE  OF  LIFE  INSURANCE 


CHAPTEE  XI 

THE  MEASUREMENT   OF   RISK  IN  LIFE  INSURANCE 

By 
BEUCE  D.  MUDGETT 

THE  THEORY  or  PROBABILITY 

Insurance  has  been  defined  as  the  institution  which  elimi- 
nates risk  or  which  substitutes  certainty  for  uncertainty.  The 
occurrence  of  events  insured  against  cannot  wholly  be  pre- 
vented, but  the  uncertainty  of  financial  loss  through  such  oc- 
currences can  be  eliminated  by  distributing  the  loss  over  a 
group.  Thus  a  man  cannot  be  sure  whether  or  not  his  house 
will  burn  even  if  he  use  all  the  preventive  measures  known. 
If  the  house  burns  the  property  is  lost  and  gone  forever  — 
that  much  material  value  has  been  actually  destroyed.  But 
it  is  not  necessary  that  the  owner  should  stand  the  entire 
loss.  Before  the  fire  occurred  it  was  not  known  whether 
his  house  would  burn  or  some  one's  else  and  h«  could  agree 
with  other  owners  of  houses  that  they  would  all  contribute 
to  a  common  fund  from  which  any  unfortunate  owner  who 
lost  his  house  by  fire  should  be  recompensed.  Thus  instead 
of  the  loss  falling  on  one  it  can  be  divided  equally  among 
all.  This  is  the  essence  of  insurance  and  it  illustrates  the 
meaning  of  the  statement  that  insurance  is  the  elimination  of 
uncertainty  or  the  replacement  of  uncertainty  by  certainty. 
The  common  contribution  to  the  fund  above  referred  to  con- 
stitutes the  certain  loss  and  is  measured  by  the  premium ;  the 
uncertain  loss  refers  to  the  uncertainty  that  a  particular 
house  will  burn.  The  same  situation  exists  with  respect  to 
life  insurance.  It  is  not  death  itself  that  can  be  distributed, 
i.e.  parcelled  out  among  a  number  of  insurers,  but  the  financial 
consequences  of  death.  Man  has  an  earning  power  during 

119 


120      THE  PEINCIPLES  OF  LIFE  INSURANCE 

a  certain  period  of  his  life  which  is  lost  to  his  business  or 
his  family  by  premature  death,  but  it  is  not  known  in  advance 
upon  whom  death  will  fall  prematurely,  hence  all  men  can 
contribute  to  a  fund  which  will  be  used  to  satisfy  the  business 
and  family  needs  of  those  who  die  early. 

These  two  illustrations  suggest  the  possibilities  that  exist 
for  the  application  of  the  insurance  principle.  In  whatever 
field  risk  is  found  to  exist,  there  the  principle  can  be  applied. 
The  complete  working  out  of  a  scientific  insurance  plan 
necessitates  some  method  of  measuring  this  risk  in  order  to 
determine  the  amount  of  each  individual's  contribution  to 
the  common  fund.  The  correct  measurement  of  risk,  there- 
fore, lies  at  the  foundation  of  any  system  of  insurance.  This 
accomplishment  is  rendered  possible  through  the  application 
to  statistical  data,  covering  the  phenomenon  in  question,  of 
certain  laws  developed  in  the  field  of  mathematics  known  as 
the  laws  of  probability,  and  it  will  be  necessary  to  state  and 
explain  them  before  proceeding  further. 

The  Laws  of  Probability. —  The  science  of  probabilities 
furnishes  three  principles  of  which  practical  use  is  made 
in  life  insurance.  They  may  be  called  respectively  (1) 
the  law  of  certainty,  (2)  the  law  of  simple  probability,  and 
(3)  the  law  of  compound  probability.  Their  use  makes  pos- 
sible the  description  of  risk  in  terms  of  mathematical  values, 
and  the  statement  of  the  three  laws  is  as  follows:  (1) 
certainty  may  be  expressed  by  unity,  or  one;  (2)  simple 
probability,  or  the  probability  or  chance  that  an  event  will 
happen  or  that  it  will  not  happen  may  be  expressed  by  a  frac- 
tion; and  (3)  compound  probability,  or  the  chance  that  two 
mutually  independent  events  will  happen  *  is  the  product  of 
the  separate  probabilities  that  the  events,  taken  separately, 
will  happen. 

An  illustration  will  serve  to  make  these  statements  clear. 
If  a  box  contains  twenty  marbles  and  it  is  known  that  five  of 

i  There  are  laws  of  compound  probabilities,  for  instance,  where 
the  separate  events  are  dependent,  but  they  do  not  enter  into  the 
present  discussion. 


MEASUREMENT  OF  RISK  121 

the  marbles  are  black  and  the  remainder  white,  let  us  suppose 
it  is  desired  to  know  the  probability  that  a  marble  drawn  at 
random  from  the  box  will  be  black.  If  any  marble  has 
equal  chances  with  any  other  of  being  drawn,  then  there  are 
twenty  different  draws  that  might  be  made  and  if  five  of 
the  marbles  are  black  then  it  can  be  said  that  there  are  five 
chances  out  of  twenty  of  drawing  a  black  marble,  or  the 
chance  is  in  the  ratio  of  five  to  twenty,  or  is  -^,  This 
fraction  is  obtained  in  the  following  manner:  The  de- 
nominator equals  the  total  number  of  marbles  in  the  box; 
the  numerator  equals  the  number  that  satisfies  the  condition 
stated,  namely,  the  quality  of  being  black.  In  like  manner 
it  might  be  desired  to  know  the  chance  that  the  marble  will 
not  be  black,  and  by  a  like  method  of  reasoning  it  is  found 
that  this  probability  equals  |-f.  From  these  facts  it  is  possi- 
ble to  formulate  a  general  statement  of  the  method  of  de- 
termining simple  probabilities  as  follows :  The  denominator 
will  equal  the  total  number  of  possible  trials  or  chances  that 
a  thing  may  happen  or  may  not  happen  or  the  total  number 
of  instances  dealt  with  —  in  the  example  above,  total  marbles. 
The  numerator  will  be  composed  of  those  instances  only 
which  satisfy  the  conditions  imposed  —  in  the  same  example, 
black  marbles. 

In  the  illustration  here  used  there  are  marbles  of  two  kinds 
only,  black  and  white,  and  any  marble  withdrawn  from  the 
box  must  be  one  or  other  color.  The  total  existing  probabili- 
ties are  therefore  two,  the  probability  of  drawing  a  black 
marble  and  the  probability  of  drawing  a  white  one.  If  cer- 
tainty is  represented  by  unity,  then  unity,  or  the  value  "  one," 
will  represent  the  fact  of  drawing  any  marble.  But  any  mar- 
ble drawn  at  random  may  be  either  black  or  white  and 
since  the  probability  of  drawing  the  former  is  -^-,  and  of  the 
latter  |~|,  and  since  certainty  must  equal  the  sum  of  all 
equals  1,  therefore  certainty  must  equal  the  sum  of  all 
separate  probabilities,  in  this  case 

-5_  J_  is.  =  1 

20      I      20 

This  corollary  that  certainty  equals  the  sum  of  all  separate 


122          THE  PRINCIPLES  OF  LIFE  INSURANCE 

probabilities  may  be  further  illustrated  by  the  familiar  ex- 
ample of  the  coin.  It  is  certainty  that  a  coin  tossed  into 
the  air  will  come  to  rest  on  one  side  and  this  fact  is  repre- 
sented by  the  value  "  one."  Now,  since  it  has  but  two  sides, 
the  sum  of  the  separate  probabilities  that  it  will  alight  heads 
up  or  tails  up  must  equal  one.  The  probability  of  falling 
heads  up,  determined  by  the  above  rule  for  valuing  simple 
probabilities,  is  J,  since  there  are  two  possible  sides  and  one 
is  heads;  likewise  the  probability  of  falling  tails  up  is  ^, 
and  the  sum  of  these  two  fractions  equals  one. 

The  probability  that  both  of  two  mutually  independent 
events  will  happen  is  equal  to  the  product  of  the  simple  prob- 
abilities that  the  events  taken  separately  will  happen.  Sup- 
pose that  two  coins  are  tossed  up  and  it  is  desired  to  know 
the  chance  that  they  will  both  fall  heads  up.  By  the  state- 
ment of  the  law  above  it  will  be  J  X  J  or  J,  since  it  is  known 
that  the  chance  is  -J  that  each  separate  coin  will  fall 
heads  up.  That  this  is  the  correct  result  may  easily  be 
demonstrated.  Suppose  the  two  coins  are  a  nickel  and 
a  dime.  Then  the  different  ways  in  which  they  may  fall 
are: 

Nickel  Dime 


Heads  up  Heads  up 

Heads  up  Tails    up 

Tails    up  Heads  up 

Tails    up  Tails    up 

These  four  combinations  comprise  the  only  possible  ones  that 
can  be  made  with  tne  two  coins  and  the  first  combination  is 
the  only  one  of  the  four  that  satisfies  the  stipulated  condi- 
tions, namely,  both  coins  heads  up.  Hence  there  is  one  chance 
in  four  for  this  combination  to  appear,  or  the  probability  of 
its  occurrence  is  J. 

According  to  the  law  of  compound  probabilities,  as  stated 
herewith,  the  product  of  simple  probabilities  equals  the  proba- 
bility that  two  events  will  happen  at  the  same  time,  only 


MEASUREMENT  OF  RISK  123 

when  the  two  events  are  mutually  independent.  The  happen- 
ing of  the  one  must  have  no  effect  upon  the  occurrence  or 
non-occurrence  of  the  other,  that  is,  must  neither  make  it 
necessary  for  the  second  to  occur  nor  make  it  impossible.  If 
the  law  were  valid  irrespective  of  this  qualification,  such  ab- 
surd results  as  the  following  might  be  obtained.  The  chance 
that  the  coin  will  fall  heads  up  is  J  and  the  chance  that  it 
will  fall  tails  up  is  likewise  -J.  Therefore  the  chance  that  it 
will  fall  both  heads  up  and  tails  up  is  ^  X  i  or  J.  The 
absurdity  results  from  the  fact  that  the  occurrence  of  the  first 
named  event  makes  it  impossible  for  the  second  to  occur 
simultaneously. 

The  Use  of  This  Theory  to  Forecast  Future  Events. 
—  The  value  of  these  three  laws  of  probability  lies  in  the 
fact  that  they  can  be  used  to  forecast  future  events.  Future 
events  can  be  foretold  in  one  of  two  ways :  ( 1 )  by  a  priori  or 
deductive  reasoning,  and  (2)  from  knowledge  of  what  has 
happened  in  the  past  under  similar  conditions.  The  validity 
of  a  priori  reasoning  depends  on  the  completeness  with  which 
all  the  causes  at  work  in  the  determination  of  any  phenomenon 
are  known ;  and  the  limitations  of  the  human  mind  are  such 
that  a  priori  reasoning  does  not  furnish  a  safe  basis  upon 
which  to  develop  a  superstructure  guaranteeing  that  degree  of 
certainty  which  is  required  in  insurance.  Reasoning  induc- 
tively, or  on  the  assumption  that  what  has  happened  in  the 
past  will  happen  again  in  the  future  if  the  same  conditions 
are  present,  does  not  require  an  analysis  of  the  causes  of  phe- 
nomena in  order  to  predict  future  events.  There  lies  behind 
this  statement  the  assumption  that  all  things  are  governed 
by  law.  In  the  cases  here  used  to  illustrate  the  principles  of 
probability  this  is  the  law  of  pure  chance.  It  is  an  even 
chance  one  with  another  that  any  marble  may  be  drawn  from 
the  box  or  that  either  side  of  the  coin  may  be  "  up/'  Then 
if  in  a  great  number  of  trials  it  has  been  found  that  the  coin 
falls  "  heads  up  "  one-half  of  the  time  the  conclusion  follows 
that  this  result  will  follow  approximately  if  the  same  number 
of  trials  is  taken  again. 


124        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

This  fact  has  important  bearings  upon  life  insurance. 
From  data  showing  the  length  of  life  and  ages  at  death  in 
the  past  it  is  possible  to  predict  probabilities  of  death  and  of 
survival  in  the  future.  This  prediction  is  based  on  the  as- 
sumption that,  like  the  law  of  chance,  there  is  a  law  of  mor- 
tality by  which  human  beings  die;  that  certain  causes  are  in 
operation  which  determine  that  out  of  a  large  group  of  per- 
sons at  birth  a  definite  number  of  lives  will  fail  each  year 
until  all  have  died;  and  that  the  force  of  mortality  could  be 
measured  if  only  the  causes  at  work  were  known.  But  it  is 
not  necessary  to  analyze  this  law  of  mortality  completely  and 
to  know  all  the  operating  causes  in  order  to  predict  the  pos- 
sible rate  of  mortality  in  a  group  of  persons.  By  studying 
the  rate  of  death  among  any  group  and  noting  all  the  circum- 
stances that  might,  according  to  our  best  knowledge,  affect 
that  rate,  it  is  possible  to  surround  any  future  group  of  per- 
sons with  approximately  the  same  set  of  circumstances  and 
expect  approximately  the  same  rate  of  death.  Thus  without 
complete  knowledge  of  the  law  of  mortality  a  working  basis 
is  found  for  predicting  future  rates  of  death.  It  is  neces- 
sary then  to  have  mortality  statistics  in  order  to  develop  a 
scientific  plan  of  life  insurance. 

Accuracy  of  the  Theory  of  Probabilities  —  The  Law  of 
Average. —  The  accuracy  of  the  theory  of  probabilities,  on 
which  future  deaths  will  be  estimated,  or  the  closeness  with 
which  the  theoretical  approximates  actual  experience  has  im- 
portant bearings  on  the  success  of  any  method  of  insuring 
lives.  This  accuracy  depends  on  two  factors:  (1)  the  accu- 
racy of  the  data,  and  (2)  the  number  of  units  or  trials  taken. 
For  instance,  suppose  that  probabilities  of  death  were  com- 
puted on  the  basis  of  population  statistics  and  death  registra- 
tion returns.  Population  censuses  are  taken  by  the  Federal 
Government  only  once  in  ten  years  and  these  are  supplemented 
in  some  states  by  a  state  enumeration  in  the  year  midway 
between  two  federal  census  years.  Thus  if  death  rates  were 
to  be  computed  for  the  year  1914  the  last  actual  count  of 
population  would  be  for  the  year  1910,  and  the  population  for 


MEASUREMENT  OF  RISK  125 

1914  would  have  to  be  estimated.  This  estimate  is  certain 
to  contain  an  element  of  error.  Furthermore,  the  deaths 
among  the  estimated  population  would  be  determined  from 
the  registered  deaths  within  the  given  area,  but  in  no  section 
of  the  United  States  are  all  deaths  recorded.  Indeed  the 
qualification  for  admission  into  the  "  registration  area "  is 
the  registration  of  only  ninety  per  cent,  of  the  probable 
deaths.  Therefore  death  rates  based  on  population  and  death 
registration  returns  may  contain  two  large  elements  of  error 
and  for  this  reason  may  fail  to  measure  approximately  the 
law  of  mortality.  Mortality  statistics,  from  whatever  source, 
should  be  scrutinized  searchingly  in  order  to  detect  inaccu- 
racies in  the  original  data. 

The  second  factor  which  determines  the  accuracy  of  the 
laws  of  probability  is  the  number  of  units  or  trials  taken. 
This  may  be  illustrated  by  the  coin  example  heretofore  used. 
It  was  stated  that  the  probability  of  falling  heads  up  is  -J. 
There  is  no  inaccuracy  in  the  data  on  which  this  fraction  is 
based,  for  there  are  two  sides  only  to  the  coin  and  one  is 
heads.  To  illustrate  the  inaccuracy  dependent  on  the  num- 
ber of  trials,  the  following  experiment  was  undertaken  by  the 
writer.  An  ordinary  copper  cent  was  flipped  three  hundred 
times  and  the  results,  whether  heads  or  tails  up,  were  re- 
corded for  each  ten  throws.  If  the  probable  experience  had 
agreed  absolutely  with  the  actual,  the  results  would  have 
shown  five  throws  heads  arid  five  throws  tails  for  each  ten 
trials.  The  actual  results  are  recorded  herewith : 

RESULTS  OF  EACH  100  TRIALS  IN  GROUPS  OF  TEN 


First    100 
trials 

Heads 

8  —  2 

—  6 

—  4 

—  3 

—  4 

—  3 

—  5 

—  6 

—  4 

=  45 

Tails 

2  —  8 

—  4 

—  6 

—  7 

—  6 

7 

_  Q 

—  4 

—  6 

=  55 

Second    100 
trials 

Heads 

5  —  6 

-  o 

—  5 

—  8 

—  5 

—  6 

—  6 

—  2 

—  5 

=  53 

Tails 

5  —  4 

—  5 

—  5 

—  2 

—  5 

A 

—  4 

—  8 

—  5 

=  47 

Third  100 
trials 

Heads 

7  —  5 

-1 

—  5 

—  5 

—  6 

—  7 

—  5 

—  5 

—  6 

=  52 

Tails 

3  —  5 

—  9 

—  5 

—  5 

—  4 

—  3 

—  5 

—  5 

—  4 

=  48 

126 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


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MEASUREMENT  OF  RISK 


127 


The  table  shows  that  in  thirty  trials  of  ten  throws  each 
ithe  actual  experience  coincided  with  the  probable  in  eleven 
cases,  that  in  two  instances  heads  appeared  eight  times  out 
of  ten,  and  in  one  case  only  once.  These  results  in  groups  of 
|  ten  may  be  combined  into  groups  of  twenty,  thirty,  fifty,  one 
hundred,  or  in  a  single  group  of  three  hundred,  and  compari- 
sons may  then  be  made  of  the  fluctuations  in  those  respective 
groups.  By  this  arrangement  the  original  data  assumes  the 
form  shown  on  page  126: 

In  the  above  table  the  data  are  arranged  in  fifteen  groups 
of  twenty  throws  each,  ten  groups  of  thirty,  six  of  fifty,  three 
of  one  hundred,  and  a  single  group  of  the  three  hundred 
throws  and  the  number  of  times  the  coin  fell  heads  or  tails 
is  shown  for  each  group.  The  important  fact  to  be  considered 
is  the  relation  between  the  probable  and  the  actual  experience 
in  each  grouping  of  the  data.  For  instance,  in  twenty  throws 
the  probability  is  that  heads  will  appear  ten  times,  but  the 
figures  show  that  in  one  case  this  result  occurred  thirteen 
times  and  once  only  six;  in  thirty  throws  heads  appeared  as 
many  as  eighteen  times  in  two  instances  and  as  few  as  eleven 
the  same  number  of  times.  The  following  brief  table  shows 
the  maximum  and  the  minimum  number  of  times  the  coin 
turned  heads  up  in  any  single  trial  of  the  specified  number 
of  throws: 

FLUCTUATIONS  IN  NUMBER  OF  TIMES  HEADS 


IN  GBOUPS  OF 

NUMBER  OF 
TIMES  TRIED 

MAXIMUM 
NUMBER 
TIMES  HEADS 
APPEARED 

MINIMUM 
NUMBER 
TIMES  HEADS 
APPEARED 

10  throws 
20 
30       " 
50 
100 
300 

30 
15 
10 
6 
3 
1 

8 
13 
18 
29 
53 
150 

1 
6 
11 
22 
45 
150 

If  this  data  are  now  reduced  to  the  form  of  percentage  the 
results  can  be  more  readily  compared^  for  the  amount  of  the 


128        THE  PRINCIPLES  OF  LIFE  INSURANCE 


fluctuations  will  then  have  a  common  basis.  It  is  understood 
that  the  probability  of  the  coin  falling  heads  up  is  \  and  this 
will  be  represented  by  fifty  per  cent.  The  variation  of  the 
actual  percentage  from  fifty  per  cent,  will  therefore  be  the 
measure  of  the  variation.  The  table  presented  herewith  gives 
the  results  obtained: 

PERCENTAGE  OF  TIMES  HEADS  UP 


IN  GROUPS 

OF 

MAXIMUM 
PER  CENT. 

MINIMUM 
PER  CENT. 

10 
20 
30 
50 
100 
300 

80 
65 
60 
58 
53 
50 

10 
30 
36.7 
44 
45 
50 

This  table  furnishes  the  basis  for  an  important  generaliza- 
tion with  reference  to  the  accuracy  of  the  theory  of  proba- 
bility. It  shows  that  where  the  coin  was  thrown  ten  times 
the  results  varied  from  a  minimum  of  ten  per  cent,  to  a  maxi- 
mum of  eighty  per  cent.;  where  twenty  throws  were  made 
the  variation  was  less,  viz,  from  thirty  to  sixty-five  per 
cent.;  and  that  as  the  number  of  throws  increased  the  vari- 
ation became  smaller  and  smaller  and  the  percentage  of  times 
heads  appeared  approached  fifty,  the  true  probable  percentage. 
That  the  three  hundred  throws  resulted  in  exactly  one  hundred 
and  fifty  heads  must  be  regarded  as  an  accident;  but  it  can 
be  said  with  equal  certainty  that  it  would  be  impossible  out  of 
any  three  hundred  purely  chance  throws  to  get  as  many  as 
eighty  per  cent,  or  as  few  as  ten  per  cent,  to  fall  heads  up. 
The  generalization  referred  to  above  is  as  follows:  Actual 
experience  may  show  a  variation  from  the  true  "  probable  " 
experience  but  as  the  number  of  trials  is  increased  this  vari- 
ation decreases;  and  if  a  very  great  number  of  trials 
were  taken  the  actual  and  the  probable  experience  would 
coincide.  Concretely,  if  the  coin  were  flipped  ten  million 
times  and  it  were  a  pure  chance  which  way  it  would  fall,  the 


MEASUREMENT  OF  RISK  129 

actual  results  would  be  so  near  five  million  times  heads  that 
he  difference  would  be  negligible.  This  generalization  is 
called  the  law  of  average.  This  law  is  fundamental  to  all 
nsurance.  Premium  rates  are  based  on  probable  losses  and 
srill  not  accurately  measure  the  risk  unless  the  actual  experi- 
ence approximates  the  probable.  That  this  approximation 
shall  be  realized  it  is  at  all  times  necessary  to  deal  with  a 
sufficiently  large  number  of  cases  to  guarantee  that  great 
luctuations  in  results  will  be  eliminated,  i.e.  to  insure  the 
operation  of  the  law  of  average.  In  other  words  prediction 
of  the  future  in  life  insurance  based  on  what  has  happened 
tn  the  past  can  be  made  for  a  large  group  of  persons ;  it  can- 
not be  made  for  a  single  individual.  When  a  mortality  table 
shows  that  persons  of  a  certain  age  die  at  the  rate  of  seven 
Der  thousand  per  year  that  does  not  mean  that  out  of  a  group 
one  thousand  exactly  seven  will  die  within  a  year,,  but 
that  out  of  a  large  group,  maybe  containing  many  thousands, 
;he  deaths  will  occur  at  the  rate  of  seven  per  thousand. 

With  reference  to  the  prediction  of  future  mortality  rates 
;he  law  of  average  has  a  double  application.  Future  mor- 
tality will  be  measured  on  the  basis  of  past  mortality  data. 
These  data  of  the  past  will  supposedly  be  an  approximate 
measure  of  the  law  of  mortality  heretofore  referred  to.  But 
the  statistics  used  for  this  purpose  must  be  of  sufficiently 
general  application  and  must  include  a  sufficiently  large  group 
>of  individuals  to  insure  the  operation  of  the  law  of  average. 
Only  in  case  this  is  so  will  the  data  in  question  be  a  fair 
jineasure  of  the  true  law  of  mortality.  Granted  then  that  the 
collected  data  are  approximately  correct,  they  become  a  meas- 
ure of  future  mortality,  only  in  case  the  group  among  whom 
{the  probable  deaths  are  to  be  estimated  is  large  enough  to 
guarantee  an  average  death  rate  or  the  operation  of  the  law 
of  average  within  the  group. 

THE  MEASUREMENT  OF  MORTALITY  —  MORTALITY  TABLES 

The  establishment  of  any  plan  of  insuring  against  prema- 
ture death  requires  some  means  of  giving  mathematical  values 


130          THE  PRINCIPLES  OF  LIFE  INSURANCE 

to  the  chances  of  death,  and  the  considerations  advanced  in 
the  first  division  of  this  chapter  show  that  the  laws  of  proba- 
bility can  be  used  for  this  purpose  as  soon  as  trustworthy 
data  are  secured  showing  the  course  of  past  mortality.  Mor- 
tality tables,  as  such  data  are  called,  are  records  of  past 
mortality  put  into  such  form  as  can  be  used  in  estimating  the 
course  of  future  deaths. 

Sources  of  Mortality  Tables. —  There  are  two  sources 
from  which  the  best-known  mortality  tables  in  existence  to-day 
have  been  obtained:  (1)  population  statistics  obtained  from 
census  enumerations,  and  the  returns  of  deaths  from  registran 
tion  offices,  and  (2)  the  mortality  statistics  of  insured  lives. 
Well-known  examples  of  the  former  are  the  English  life 
tables  of  Drs.  Farr,  Ogle,  and  Tatham,  successively  in  charge 
of  the  General  Eegistry  Office  of  England  and  Wales.  Dr. 
Farr's  life  table,  for  instance,  was  based  on  the  registered 
deaths  in  England  and  Wales  during  the  years  1838-54,  and 
on  the  two  census  enumerations  of  population  for  1841  and 
1851. 

Objection  to  Tables  Based  'on  Population  Data. —  For 
the  purposes  of  measuring  the  mortality  of  insured  lives, 
however,  it  is  questionable  whether  statistics  of  a  general 
population  can  be  used.  Such  data,  to  be  sure,  would  repre- 
sent the  average  mortality  of  a  population  group  and  to  that 
extent  would  approximate  the  true  law  of  mortality.  But  for 
purposes  of  insurance  this  may  or  may  not  be  the  mortality 
rate  desired.  An  insurance  company  wants  a  measure  of  the 
mortality  occurring  among  insured  lives  and  it  is  probable 
that  this  may  differ  from  that  of  a  specific  population  group. 
Insured  lives  are  subject  to  special  influences  affecting  mor- 
tality and  these  factors  must  be  taken  into  consideration. 
The  statement  has  been  made  that  if  an  insurance  company 
could  insure  every  person  who  passed  a  certain  corner  in  a 
large  city  until  it  had  a  large  enough  group  to  guarantee  the 
operation  of  the  law  of  average,  the  company  could  dispense 
with  its  medical  examination.  This  is  probably  true,  but  the 
i  trouble  is,  when  the  matter  of  insurance  is  left  to  the  choice 

\ 


MEASUREMENT  OF  RISK  131 

of  the  individual,  not  every  one  who  passed  the  corner  in 
question  would  insure;  and  if  this  group  could  be  divided 
into  two  parts,  those  who  insure  and  those  who  do  not,  the 
former  would  show  a  much  higher  rate  of  mortality  than  the 
latter.  Statistics  of  insurance  companies  bear  out  this  state- 
ment. Mortality  tables  based  on  population  statistics  formed 
the  first  scientific  basis  for  insurance  rates,  but  their  approxi- 
mation to  true  insurance  mortality  was  not  close  and  they 
were  supplanted  by  tables  based  on  insured  lives  as  soon  as 
the  experience  was  forthcoming  on  which  to  base  the  latter. 
The  present  tables  in  use  by  American  life-insurance  com- 
panies and  required  by  most  state  insurance  departments  as  a 
basis  for  the  valuation  of  policy  liabilities  have  been  con- 
structed from  data  of  insured  lives. 

Description  of  a  Mortality  Table. —  A  mortality  table  has 
been  described  as  the  picture  of  "  a  generation  of  individuals 
passing  through  time."  2  It  shows  a  group  of  individuals 
entering  upon  a  certain  age  and  traces  the  history  of  the  en- 
tire group  year  by  year  until  all  have  died.  Since  any  de- 
scription will  best  be  understood  by  reference  to  an  actual 
table,  the  American  Experience  table,  used  almost  exclusively 
for  the  computation  of  premium  rates  by  old  line  companies 
in  the  United  States,  is  presented  on  pages  132-133. 

The  essential  features  of  the  table  are  the  two  columns  of 
the  number  living  and  the  number  dying  at  designated  ages. 
It  is  assumed  that  a  group  of  100,000  persons  comes  under 
observation  at  exactly  the  same  moment  as  they  enter  upon 
the  tenth  year  of  life.  Of  this  group  749  die  during  the 
year,  leaving  99,251  to  begin  the  eleventh  year.  The  table 
proceeds  in  this  manner  to  record  the  number  of  the  original 
100,000  dying  during  each  year  of  life  and  the  number 
living  at  the  beginning  of  each  succeeding  year  until  but 
three  persons  of  the  original  group  are  found  to  enter  upon 
the  ninety-fifth  year  of  life,  these  three  dying  during  that 
year. 

"NEWSHOLME,  Vital  Statistics,  ed.  3,  255. 


132        THE  PRINCIPLES  OF  LIFE  INSURANCE 


AMERICAN  EXPERIENCE  TABLE  OF  MORTALITY 


AGE 

NUMBER 
LIVING  AT 
BEGINNING  OF 
DESIGNATED 
YEAR 

NUMBER 
DYING  DURING 
DESIGNATED 
YEAR 

YEARLY 
PROBABILITY 
OF  DYING 

YEARLY 
PROBABILITY 
OF  SURVIVING 

10 

100,000 

749 

.007490 

.992510 

11 

99,251 

746 

.007516 

.992484 

12 

98,505 

743 

.007543, 

.992457 

13 

97,762 

740 

.007569 

.992421 

14 

97,022 

737 

.007596 

.992404 

15 

96,285 

735 

.007634 

.992366 

16 

95,550 

732 

.007661 

.992339 

17 

94,818 

729 

.007688 

.992312 

18 

94,089 

727 

.007727 

.992273 

19 

93,362 

725 

.007765 

.992235 

20 

92,637 

723 

.007805 

.992195 

21 

91,914 

722 

.007855 

.992145 

22 

91,192 

721 

.007906 

.992094 

23 

90,471 

720 

.007958 

.992042 

24 

89,751 

719 

.008011 

.991989 

25 

89,032 

718 

.008065 

.991935 

26 

88,314 

718 

.008130 

.991870 

27 

87,596 

718 

.008197 

.991803 

28 

86,878 

718 

.008264 

.991736 

29 

86,160 

719 

.008345 

.991655 

30 

85,441 

720 

.008427 

.991573 

31 

84,721 

721 

.008510 

.991490 

32 

84,000 

723 

.008607 

.991393  ' 

33 

83,277 

726 

.008718 

.991282 

34 

82,551 

729 

.008831 

.991169 

35 

81,822 

732 

.008946 

.991054 

36 

81,090 

737 

.009089 

.990911 

37 

80,353 

742 

.009234 

.990766 

38 

79,611 

749 

.009408 

.990592 

39 

78,862 

756 

.009586 

.990414 

40 

78,106 

765 

.009794 

.990206 

41 

77,341 

774 

.010008 

.989992 

42 

76,567 

785 

.010252 

.989748 

43 

75,782 

797 

.010517 

.989483 

44 

74,985 

812 

.010829 

.989171 

45 

74,173 

828 

.011163 

.988837 

46 

73,345 

848 

.011562 

.988438 

47 

72,497 

870 

.012000 

.988000 

48 

71,627 

896 

.012509 

.987491 

49 

70,731 

927 

.013106 

.986894 

50 

69,804 

962 

.013781 

.986219 

51 

68,842 

1,001 

.014541 

.985459 

52 

67,841 

1,044 

.015389 

.984611 

MEASUREMENT  OF  KISK 


133 


AMERICAN  EXPERIENCE  TABLE  OP  MORTALITY  —  (Continued) 


AGE 

NUMBER 
LIVING  AT 
BEGINNING  OF 
DESIGNATED 
YEAR 

NUMBER 
DYING  DURING 
DESIGNATED 
YEAR 

YEARLY 
PROBABILITY 
OF  DYING 

YEARLY 
PROBABILITY 
OF  SURVIVING 

53 

66,797 

1,091 

.016333 

.983667 

54 

65,706 

1,143 

.017396 

.982604 

55 

64,563 

1,109 

.018571 

.981429 

56 

63,364 

1,260 

.019885 

.980115 

57 

62,104 

1,325 

.021335 

.978665 

58 

60,779 

1,394 

.022936 

.977064 

59 

59,385 

1,468 

.024720 

.975280 

CO 

57,917 

1,546 

.026693 

.973307 

61 

56,371 

1,628 

.028880 

.971120 

62 

54,743 

1,713 

.031292 

.968708 

63 

53,030 

1,800 

.033943 

.966057 

64 

51,230 

1,889 

.036873 

.963127 

65 

49,341 

1,980 

.040129 

.959871 

66 

47,361 

2,070 

.043707 

.956293 

67 

45,291 

2,158 

.047647 

.952353 

68 

43,133 

2,243 

.052002 

.947998 

69 

40,890 

2,321 

.056762 

.943238 

70 

38,569 

2,391 

.061993 

.938007 

71 

36,178 

2,448 

.067665 

.932335 

72 

33,730 

2,487 

.073733 

.926267 

73 

31,243 

2,505 

.080178 

.919822 

74 

28,738 

2,501 

.087028 

.912972 

75 

26,237 

2,476 

.094371 

.905629 

76 

23,<61 

2,431 

.102311 

.897689 

77 

21,330 

2,369 

.111064 

.888936 

78 

18,961 

2,291 

.120827 

.879173 

79 

16,670 

2,196 

.131734 

.868266 

80 

14,474 

2,091 

.144466 

.855o34 

81 

12,383 

1,964 

.158605 

.841395 

82 

10,419 

1,816 

.174297 

.825703 

83 

8,603 

1,648 

.191561 

.808439 

84 

6,955 

1,470 

.211359 

.788641 

85 

5.485 

1,292 

.235552 

.764448 

86 

4,193 

1.114 

.265681 

.734319 

87 

3,079 

933 

.303020 

.696980 

88 

2,146 

744 

.346692 

.653308 

89 

1,402 

555 

.395863 

.604137 

90 

847 

385 

.454545 

.545455 

91 

462 

246 

.532466 

.467534 

92 

216 

137 

.634259 

.365741 

93 

79 

58 

.734177 

.265823 

94 

21 

18 

.857143 

.142857 

9r- 

3 

3 

1.000000 

.000000 

134          THE  PRINCIPLES  OF  LIFE  INSURANCE 

Construction  of  the  Mortality  Table. — The  table  as  given 
above  represents  the  mortality  data  in  its  final  form  for  use  in 
expressing  probabilities  of  death  and  of  survival.  It  is  mani- 
festly impossible  for  any  insurance  company  to  insure  a  group 
of  100,000  persons  of  exactly  the  same  age  and  at  exactly 
the  same  time,  and  it  is  equally  impossible  to  keep  any  such 
group  under  observation  until  all  have  died.  Insurance  poli- 
cies are  written  at  all  times  of  the  year  and  on  lives  at  various 
ages.  It  is  entirely  practicable  that  a  record  be  kept  of  all 
insured  lives,  showing  at  each  age  the  number  of  persons 
under  observation,  and  of  those  observed  for  one  year  at  least 
the  number  who  have  died.  If  data  are  collected,  therefore, 
showing  (1)  the  age  at  which  persons  come  under  observa- 
tion, (2)  the  duration  of  the  period  of  observation,  and  (3) 
the  number  dying  during  one  year,  for  each  age,  the  materials 
will  be  furnished,  out  of  which  a  mortality  table  may  be  con- 
structed. Suppose,  for  illustration,  that  statistics  have  been 
collected  as  follows : 


AGE 


NUMBER  UNDER        NUMBER  DYING  BEFORE 
OBSERVATION  END  OF  YEAR 


10  30,000  210 

11  150,000  1200 
12,  etc.           80,000  720 

From  these  figures  death  rates  may  be  computed  for  the 
respective  ages  in  the  following  manner : 

KATE  OF  DEATH  KATE  OF  DEATH 

AGE                        EXPRESSED  AS  A  EXPRESSED  AS 

FRACTION  A  DECIMAL 

10  -sSif          =  '007 

11  WL         =  .008 

12 
Death  rates  may  be  so  computed  for  each  separate  age  to 


MEASUREMENT  OF  RISK  135 

the  maximum  limit  of  life,  if  only  the  data  are  collected  as 
required  above.  If  these  figures  can  be  considered  as  repre- 
senting the  yearly  probabilities  of  dying  3  for  persons  of  each 
given  age,  a  mortality  table  may  be  constructed  from  them 
by  assuming  a  group  of  say  100,000  persons  at  the  youngest 
age  for  which  it  is  desirable  to  compute  the  table  and  then 
reducing  the  group  by  reducing  the  number  yearly  according 
to  the  given  figures  of  the  probabilities  of  death.  The  follow- 
ing simple  table  will  illustrate  this  method: 

123  4  5 

ASSTTMFH  SUBTRACT    (4) 

AbsuMfcu          MULTIPLY  BY       RESULT:   NUM-  FROM  (2)  FOR 
jNUAi  PROBABILITY       BER  OF  DEATHS    NEW  RADIX 

DIVING  OF  DYING  AT  GIVEN  AGE   AT  NEXT  AGE, 

EQUALS: 

10  100,000    X    .007    =     700        99,300 

11  99,300    X    .008    =      794         98,506 

12  98,506    X    .009    =     887        97,619 

13  97,619,  etc. 

Since  the  probability  of  dying  at  age  10  is  .007,  there  will 
occur  700  deaths  during  the  year  among  the  100,000  starting 
at  age  10,  this  leaves  99,300  of  the  group  to  begin  age  11  and 
this  latter  number  dies  at  the  rate  of  eight  per  thousand 
(.008),  making  794  deaths  during  the  year.  In  this  way 
the  original  100,000  are  reduced  by  deaths  year  after  year 
until  all  have  died.  Thus  is  the  statement  true  that  the 
mortality  table  represents  "  a  generation  of  individuals  pass- 
ing through  time."  In  the  mortality  table  shown  on  page 
132  the  two  columns  denoting  yearly  probabilities  of  death 
and  of  survival  represent  the  final  form  of  the  actual  statistics 
of  dying  among  insured  lives.  These  probabilities  were  then 

3  The  distinction  between  "  central  death  rates,"  as  the  above 
rates  are  called  by  actuaries,  and  "  probabilities  of  death,"  and  the 
method  of  obtaining  the  latter  from  the  former  cannot  be  explained 
in  the  space  available  here.  For  purposes  of  simplification,  death- 
rates  and  probabilities  of  death  are  therefore  assumed  to  be  identi- 
cal. For  the  construction  of  a  mortality  table,  probabilities  of 
death  are  necessary  and  they  have  reference  to  rates  of  dying  among 
a  group  of  persons  beginning  a  certain  age  of  life. 


136        THE  PRINCIPLES  OF  LIFE  INSURANCE 

applied  to  the  assumed  population  of  100,000  at  age  10,  in 
the  manner  herewith  explained,  and  the  result  was  the  Ameri- 
can Experience  table  of  mortality. 

Kinds  of  Tables  and  Important  Tables  Used  in  the 
United  States. —  There  is  an  important  classification  of  tables 
of  three  kinds  dependent  on  the  data  used  in  their  calculation. 
They  are  known  as  select,  ultimate,  and  aggregate  tables. 
These  terms  have  reference  to  the  question  whether  the  data 
used  have  been  affected  by  medical  selection.  It  is  a  well- 
known  fact  that  lives  which  have  been  newly  examined  by  an 
insurance  company  and  have  passed  the  medical  tests  required 
before  becoming  policyholders  show  a  much  lower  rate  of 
mortality  than  lives  not  so  examined.  The  number  of  deaths 
occurring,  for  example,  among  10,000  policyholders  aged 
40  who  have  just  passed  the  medical  examination  will  be 
fewer  than  among  10,000  aged  40  who  were  insured  at  age 
30,  and  have  been  policyholders  for  ten  years.  So  it  is  im- 
portant for  a  company  in  estimating  the  probable  mortality 
to  know  whether  it  has  a  large  number  of  newly  selected 
lives.  An  unusually  low  mortality  is  to  be  expected  among 
the  risks  of  a  new  company,  but  such  a  record  in  the  first  few 
years  furnishes  no  basis  for  assuming  that  the  low  mortality 
will  continue. 

Since  newly  selected  lives,  therefore,  furnish  a  lower  mor- 
tality it  is  generally  considered  the  safer  plan  for  a  company 
to  compute  premium  rates  on  the  basis  of  the  mortality  among 
risks  with  whom  the  benefits  of  fresh  medical  selection  have 
passed.  A  select  mortality  table  is  based  on  data  of  freshly 
selected  lives  only;  an  ultimate  table  excludes  this  early  data, 
usually  the  first  five  years  following  entry,  and  is  based  on 
the  ultimate  mortality  of  insured  lives.  Aggregate  tables  in- 
clude all  the  mortality  data,  the  early  years  following  entry 
as  well  as  the  later. 

The  tables  most  used  in  the  United  States  to-day  by  insur- 
ance companies  are  three.  The  Actuaries',  or  Seventeen 
Offices  table,  was  calculated  from  the  experience  of  seventeen 
British  life-insurance  companies  and  was  introduced  into  the 


MEASUREMENT  OF  RISK  137 

United  States  by  Elizur  Wright  as  the  standard  for  the  valu- 
ation of  policies  in  Massachusetts.  This  table  has  at  the 
present  time  been  largely  supplanted  by  the  American  Experi- 
ence table,  the  one  found  on  page  132.  The  latter  table  was 
published  in  1868  by  Sheppard  Homans  and  was  calculated 
from  the  mortality  experience  of  the  Mutual  Life  Insurance 
Company  of  New  York.  Most  premium  rates  for  Ameri- 
can companies  are  to-day  computed  with  this  table  as  the 
basis.  It  is  what  was  described  heretofore  as  an  ultimate 
table. 

The  National  Fraternal  Congress  table  was  derived  from 
the  experience  of  two  American  fraternal  orders  and  was  first 
published  in  1898.  It  has  been  adopted  by  the  National 
Fraternal  .Congress  and  by  a  number  of  states  as  a  standard 
for  the  computation  of  premiums  and  the  valuation  of  policies 
among  the  fraternal  societies. 

Application  of  the  Theory  of  Probabilities  to  the  Mor- 
tality Table. —  The  statement  was  made  earlier  in  this  chap- 
ter that  risk  in  life  insurance  is  measured  by  the  application 
of  the  laws  of  probability  to  the  mortality  table.  Now  that 
these  laws  are  understood  and  the  mortality  table  has  been 
explained,  a  few  simple  illustrations  may  be  used  to  show  this 
application.  Suppose  it  is  desired  to  insure  a  man  aged  35 
against  death  within  one  year,  within  two  years,  or  within 
five  years.  It  is  necessary  to  know  the  probability  of  death 
within  one,  two,  or  five  years  from  age  35.  This  probability, 
according  to  the  laws  heretofore  explained,  will  be  determined 
according  to  the  mortality  table  and  will  be  a  fraction  of 
which  the  denominator  equals  the  number  living  at  age  35 
and  the  numerator  will  be  the  number  who  have  died  during 
the  one,  two,  or  five  years,  respectively,  following  that  age. 
According  to  the  table,  81,822  persons  are  living  at  age  35, 
and  732  die  before  the  end  of  the  year.  Hence  the  proba- 
bility of  death  in  one  year  is  viffl-  During  the  two  years 
following  the  stated  age  there  are  732  -{-  737  deaths,  or  a  total 
of  1,469.  The  probability  of  dying  within  two  years  is  there- 
fore ss*  Likewise  the  total  number  of  deaths  within  five 


138        THE  PRINCIPLES  OF  LIFE  INSURANCE 

years  is   732  +  737  +  742  +  749  +  756   or  3,716,   and  the 
probability  of  dying  within  five  years  is  thus  gV^V 

Probabilities  of  survival  can  also  be  expressed  by  the  table. 
The  chance  of  living  one  year  following  age  35  will  be  a 
fraction  of  which  the  denominator  is  81,822  and  the 
numerator  will  be  the  number  who  have  lived  one  year 
following  the  specified  age.  This  is  the  number  who  are 
living  beginning  age  36,  or  81,090,  and  the  probability  of 
survival  for  one  year  is  therefore  %[%%%•  These  illustrations 
furnish  an  opportunity  for  a  proof  of  the  law  of  certainty. 
The  chance  of  living  one  year  following  age  35  is  ^"^2  an(^ 
the  chance  of  dying  within  the  same  period  is  8  ™  \  2-.  The 
sum  of  these  two  fractions  equals  %i%22  or  1,  which  is  cer- 
tainty, and  certainty  represents  the  sum  of  all  separate  proba- 
bilities, in  this  case  two,  the  probability  of  death  and  the 
probability  of  survival.  In  like  manner  many  more  instruc- 
tive examples  of  the  application  of  these  laws  to  the  mortality 
table  could  be  made,  but  they  need  not  be  carried  further  at 
this  point,  for  the  subject  will  be  fully  covered  in  the  chapters 
on  "  Net  Premiums." 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  Elements  of  Life  Insurance,  ed.  3,  24-37. 

FACKLER,  EDWARD  B.,  Notes  on  Life  Insurance,  chaps.  2,  5. 

GEPHART,  W.  F.,  Principles  of  Insurance,  chaps.  2,  3. 

Mom,  HENRY,  Life  Assurance  Primer,  chaps.  3,  6. 

WICKENS,  C.  H.,  "  On  the  methods  of  ascertaining  the  rates  of 
mortality  amongst  the  general  population  of  a  country, 
district  or  town,  or  amongst  different  classes  of  such  popu- 
lation, by  means  of  returns  of  population,  births,  deaths 
and  migration."  Journal  of  the  Institute  of  Actuaries, 
xliii,  23-84.  (Probably  the  best  complete  statement  of  the 
.subject  in  the  English  language.) 


CHAPTER  XII 

FUNDAMENTAL  PRINCIPLES  UNDERLYING  RATE-MAKING 

By 
BBUCE  D.  MUDGETT 

To  compute  premium  rates  in  life  insurance  the  following 
facts  must  be  known:  (1)  the  age  of  the  insured;  (2)  the 
kind  of  policy  to  be  issued  and  its  face  value;  (3)  the  mor- 
tality table  to  be  used  in  measuring  the  incurred  risk;  and 
(4)  the  maximum  rate  of  interest  which  the  company  is 
willing  to  guarantee  on  funds  in  its  possession.  For  exam- 
ple, if  a  contract  is  issued  promising  to  pay  the  holder  $1,000 
should  death  occur  within  the  following  twelve  months,  and  if 
the  chance  of  death  within  one  year  is  measured  by  the  Ameri- 
can Experience  table  of  mortality  and  it  is  further  known 
that  the  person  to  be  insured  is  forty  years  of  age,  all  the 
facts  are  at  hand  for  determining  the  amount  of  money  to 
be  contributed  by  him  in  order  to  cover  the  risk.  At  age  40 
the  table  shows  that  his  chances  of  dying  are  9,794  in  1,000,- 
000,  or,  expressed  as  a  decimal,  .009794.  This  decimal  multi- 
plied by  1,000  represents  the  amount  of  money  the  insured 
must  pay  to  receive  the  protection  promised,  if  it  is  assumed 
that  the  money  is  put  away  and  no  use  made  of  it  until  needed 
to  pay  losses.  While  the  illustration  is  exceedingly  simple 
and  makes  no  attempt  to  bring  out  many  of  the  complicated 
factors  found  in  a  more  complete  analysis  of  rate-making,  it 
contains  the  essential  features  of  any  rate  computation,  viz,  the 
determination  of  the  risk  covered  and  the  amount  payable  in 
case  the  risk  occurs.  But  before  a  fuller  analysis  can  be  under- 
taken it  is  necessary  to  explain  certain  peculiarities  of  life  in- 
surance which  differentiate  it  from  insurance  of  other  hazards 
and  which  are  fundamental  to  any  .discussion  of  rate-making. 

139 


140       THE  PKINCIPLES  OF  LIFE  INSURANCE 

Certain  arbitrary  rules  used  in  rate  computations  must  also 
be  stated.  To  this  twofold  task  the  present  chapter  is  de- 
voted. 

Features  Peculiar  to  Life  Insurance. —  Protection  and  in- 
vestment.—  While  most  kinds  of  insurance  contracts  have  a 
single  purpose,  namely,  the  assumption  of  a  particular  risk, 
the  great  majority  of  life-insurance  policies  embody  a  two- 
fold purpose  by  combining  insurance  with  investment.  Every 
policy  which  contains  an  endowment  feature,  i.e.  which  cre- 
ates a  fund  available  upon  survival  for  a  stated  period,  is  to 
that  extent  an  investment,  and  the  increase  of  this  investment 
fund  constantly  minimizes  the  insurance  element.  For  in- 
stance, a  policy  issued  ten  years  ago  and  having  an  endow- 
ment fund  to  its  credit  at  the  time  of  the  insured's  death 
equal  to  $500  will  pay  this  $500  and  in  addition  $500  more 
out  of  the  "  insurance  fund."  In  other  words,  by  the  growth 
of  the  "  investment  fund  "  the  insurance  element  of  the  policy 
is  constantly  decreased,  While  this  fact  is  clearly  apparent 
in  the  case  of  an  endowment  policy,  it  is  not  so  evident  in  the 
so-called  "  ordinary  life  "  policy.  But  there  is  no  difference 
in  principle,  for  the  ordinary  life  policy  accumulates  a  re- 
serve which  eventually  wipes  out  the  insurance.  As  is  often, 
stated,  an  ordinary  life  policy  based  on  the  American  Experi- 
ence table  of  mortality  matures  as  an  endowment  at  age  96. 
This  difference  between  life  insurance  and  fire  insurance,  for 
instance,  is  fundamental,  for  the  loss  in  fire  insurance  is 
measured  by  the  total  risk  of  burning,  whereas  in  life  insur- 
ance it  is  always  equal  to  the  total  risk  involved  less  the 
reserve  fund. 

The  hazard  of  death. —  Closely  associated  with  this 
reserve  factor  in  the  life-insurance  contract  is  the  nature  of 
the  hazard  or  risk  insured  against.  Fire  insurance  may 
again  be  called  upon  for  a  contrast.  In  fire  insurance,  the 
risk  is  loss  by  fire ;  and  fire  may  or  may  not  occur.  The  pre- 
mium therefore  need  only  provide  against  the  possibility  that 
fire  occur  within  the  term  of  the  policy,  and  there  is  always 
the  chance  that  the  property  may  never  burn.  But  not  so 


PRINCIPLES  UNDERLYING  RATE-MAKING     141 

with  life  insurance.  While  property  may  never  burn,  death 
is  sure  to  occur  eventually  and  death,  therefore,  as  such,  can- 
not be  insured  against.  It  can  be  provided  for.  That  is,  the 
risk  insured  against  is  the  possibility  of  death  at  some  par- 
ticular time.  A  company  can  insure  against  the  chance  of 
dying  within  One  year,  for  instance,  but  if  it  agrees  to  pay 
$1,000  at  death  whenever  it  may  occur,  it  really  must  pro- 
vide two  funds,  one  against  premature  death  and  one  to  pro- 
vide for  the  certainty  of  death  at  an  advanced  age.  Since  the 
American  Experience  table  assumes  that  all  lives  have  failed 
by  age  96,  the  company  basing  premiums  on  this  table  must 
have  a  reserve  fund  equal  to  the  face  of  the  policy  by  the  time 
the  insured  has  reached  that  age.  This  furnishes  another 
reason  why  the  ordinary  life  policy  is  sometimes  called  an 
endowment  at  age  96. 

A  long-term  unilateral  contract  with  a  fixed  and 
unchangeable  premium. —  A  third  peculiarity  of  life-insur- 
ance policies  lies  in  the  fact  that  they  are  usually  issued  for 
long  terms  at  a  premium  fixed  in  advance  and  that  the  com- 
pany does  not  retain  the  right  of  cancellation.  It  has  been 
variously  estimated  that  from  eighty  per  cent,  to  eighty-five 
per  cent,  of  all  insurance  in  force  in  the  United  States  is 
composed  of  whole-life  policies  and  twenty-year  endowments 
and  the  most  recent  statistics  show  that  about  two-thirds  of 
the  insurance  in  force  is  insurance  for  the  whole  of  life; 
hence  it  follows  that  a  company  in  computing  premiums  must 
estimate  its  experience  for  at  least  twenty  years  and  in  the 
vast  majority  of  cases  for  much  longer,  since  the  company 
must  continue  the  contract  in  force  for  so  long  as  the  insured 
pays  premiums.  Furthermore,  the  company  cannot  change 
the  premium  on  any  policies  in  force,  and  if  policies  have 
been  issued  at  inadequate  premiums,  these  contracts  must  be 
carried  at  a  loss.  If  the  deficit  cannot  be  made  up  out  of 
surplus,  of  course,  the  company  will  become  bankrupt. 

This  necessity  of  issuing  a  long-term  contract,  without  the 
right  of  cancellation,  and  at  a  premium  that  cannot  be 
changed,  compels  the  company  to  exercise  great  care  in  de- 


142          THE  PRINCIPLES  OF  LIFE  INSURANCE 

termining  the  premium  to  be  charged  for  the  risk.  The  mor- 
tality tables  used  to  measure  life  risks  represent  one  of  the 
highest  developments  in  the  application  of  past  experience  to 
the  determination  of  future  events.  In -fire,  marine,  casualty, 
and  in  fact  in  most  other  kinds  of  insurance  the  contract 
is  usually  for  one  year  or  for  a  short  term  at  most,  and 
the  company  withholds  the  right  in  most  cases  to  cancel  the 
policy  at  will.  In  a  contract  covering  one  of  the  last-named 
risks  the  company  needs  only  to  collect  a  premium  adequate 
to  cover  the  risk  for  one  year  or  for  a  few  years  at  the  most. 
If  this  should  turn  out  to  be  insufficient,  the  company  can  can- 
cel the  policy  and  thus  prevent  insolvency,  or  it  can  avail  itself 
of  the  opportunity  on  renewing  the  contract  to  increase  the 
premium. 

Application  of  the  principle  of  indemnity  in  life 
insurance. —  Life  insurance  differs  again  from  other  forms  of 
insurance  with  respect  to  the  part  played  by  the  principle  of 
indemnity  in  determining  the  amount  of  insurance  which 
can  be  carried.  In  fire  underwriting  it  is  a  fundamental  prin- 
ciple, admitting  of  no  exceptions,  unless  state  statutes  stipu- 
late to  the  contrary,  that  the  insured  shall  not  collect  more 
than  the  actual  cash  value  of  the  property  destroyed.  But 
who  will  determine  what  is  the  financial  worth  of  a  human 
life?  To  be  sure  a  rough  estimate  may  be  arrived  at,  based 
on  a  man's  income-producing  power,  but  so  long  as  the  amount 
of  insurance  applied  for  is  such  as  could  be  reasonably  needed 
by  a  man  in  any  occupation  or  profession  the  right  of  the 
insured  to  decide  for  himself  how  much  insurance  he  will 
carry  is  not  questioned. 

Assumptions  Underlying  Rate  Computations. —  When 
the  problem  of  rate  computation  is  approached  it  will  be 
found  that  several  questions  at  once  present  themselves,  the 
answers  to  which  will  exercise  much  influence  upon  the  re- 
sults to  be  obtained.  For  instance,  how  is  the  premium  to 
be  paid?  Is  it  to  be  paid  in  a  single  sum  which  will  cover 
the  risk  for  the  entire  period,  as  is  the  case  with  most  kinds 
of  insurance  contracts,  or  will  periodic  payments  be  made  an- 


PRINCIPLES  UNDERLYING  RATE-MAKING        143 

nually,  semi-annually,  or  otherwise  ?  Again,  when  is  it  to  be 
paid?  In  case  of  annual  premiums,  will  they  be  paid  at  the 
inception  of  the  risk  and  annually  thereafter,  or  will  some 
other  time  be  found  ?  Further  questions  are :  What  will  be 
done  with  the  money  between  the  time  it  is  received  and  the 
time  it  is  paid  out?  How  will  mortality  rates  be  determined 
for  periods  of  less  than  one  year  duration  in  case,  for  instance, 
monthly  premiums  are  decided  upon,  since  the  standard  mor- 
tality tables  give  nothing  less  than  yearly  rates  of  mortality  ? 
And,  finally,  when  will  death  claims  be  paid?  Clearly  these 
questions  must  be  answered  before  beginning  the  computation 
of  rates ;  and  their  answer  will  furnish  a  method  of  procedure 
in  rate-making. 

Premiums  may  be  paid  in  a  single  cash  sum,  called  the 
"single  premium,"  which  pays  for  the  entire  risk  incurred 
during  the  life  of  the  policy,  or  they  may  be  paid  in  periods 
ranging  from  one  week  to  one  year.  Most  policies  are  pur- 
chased by  an  annual  premium.  When  actuaries  first  set  them- 
selves to  the  task  of  computing  premium  rates  they  laid  down 
the  following  working  rules :  ( 1 )  premiums  will  be  paid  in  ad- 
vance; and  (2)  matured  claims  will  be  paid  at  the  end  of  the 
policy  year  in  which  the  policy  matures.  Accordingly,  if  a 
policy  is  purchased  by  a  single  premium  this  sum  is  to  be  paid 
at  the  inception  of  the  risk;  in  the  case  of  annual  premiums 
the  first  payment  is  to  be  made  on  the  date  of  issue  of  the 
policy  and  equal  amounts  annually  thereafter  on  the  anniver- 
sary of  this  date.  This  assumption  squares  with  the  actual 
practice  of  insurance  companies  for  it  is  an  invariable  rule  to 
require  the  payment  of  the  first  premium  at  the  time  the  policy 
is  issued.  In  fact  the  law  of  contracts  makes  the  payment  of 
a  consideration  a  prerequisite  to  the  beginning  of  the  risk. 

It  is  clearly  evident  in  the  case  of  single  premiums,  and  it 
is  true  only  in  lesser  degree  with  annual  premiums,  that  the 
company  will  have  the  money  on  hand  for  some  time  before 
being  called  upon  to  pay  it  out  again  in  satisfaction  of  ma- 
tured claims.  The  question  of  the  use  of  the  money  in  the 
meantime  therefore  arises.  This  money  is  invested  and  made 


144        THE  PRINCIPLES  OF  LIFE  INSURANCE 

to  earn  interest  while  in  the  company's  possession,  and  it  is 
proper  that  regard  be  had  to  these  interest  earnings  as  one 
source  of  the  fund  available  to  pay  claims.  But  since  the 
company  does  not  know  in  advance  what  rate  of  interest  will 
be  earned  it  is  necessary  to  assume  a  rate  which  is  reasonably 
certain  of  being  earned  each  year  throughout  the  long  life  of 
the  policy.  And  since  much  of  the  premium  money  received 
by  the  company  is  held  for  a  number  of  years  before  being 
paid  out  in  the  form  of  matured  claims  it  will  be  possible  to 
earn  interest  on  interest.  The  importance  of  compound  in- 
terest accumulations  to  an  insurance  company  is  evident  from 
the  following  figures  showing  first  the  amount  of  money  ob- 
tained from  investing  $1,000  at  different  rates  of  interest  for 
fifty  years;  and  second,  the  amount  of  money  which  must  be 
invested  in  the  beginning  to  equal  $1,000  in  fifty  years,  at 
different  rates  of  interest : 


fa 

t  2%      =$  2,692 

3%      =      4,384 

Amount   of   $1,OOOJ 

3i/2%  =      5,585 

in  50  years      1 

4%      =      7,107 

5%      =    11,467 

6%      =    18,420 

fa 

t  2%      =$371.50 

Present  worth  of 
$1,000  due  50     4 
years  hence 

3%      =    328.10 
3y2%  =    179.10 
4%      =    140.70 
5%      =      87.20 

I 

6%      =      54.30 

In  other  words,  if  six-per-cent.  interest  can  be  guaranteed 
on  an  investment,  $1,000  may  be  put  away  now  and  at  the 
end  of  fifty  years  it  will  have  accumulated  to  $18,420;  or  in 
order  to  pay  a  debt  of  $1,000  fifty  years  hence  it  is  necessary 
to  put  away  only  $54.30  and  earn  compound  interest  on  it  at 
the  rate  of  six  per  cent.  These  facts  are  highly  important  to 
the  insurance  company,  which  is  often  called  upon  to  keep 
policies  in  force  for  fifty  years. 

In  determining  the  interest  rate  to  be  assumed  in  comput- 
ing premiums  it  is  necessary  to  select  a  rate  which  the  com- 


PRINCIPLES  UNDERLYING  RATE-MAKING     145 

pany  is  sure  of  earning  every  year  over  a  long  period  of  years. 
The  assumption  that  6  per  cent,  could  be  earned  would 
most  surely  be  disastrous,  for  while  the  company  might  earn 
that  rate  in  a  prosperous  year,  this  period  might  be  succeeded 
by  a  business  depression  and  through  decreases  in  earnings 
and  in  the  market  value  of  securities  or  real  estate  the  com- 
pany would  fail  to  earn  the  assumed  6-per-cent.  rate  and  it 
would  be  called  upon  to  replenish  its  inadequate  earnings 
from  surplus  or,  in  the  absence  of  the  latter,  might  be  forced 
into  bankruptcy.  This  makes  it  necessary  for  the  company  to 
assume  a  rate  of  interest  which  can  be  earned  even  in  times 
of  business  depression.  The  first  premium  rates  used  in  the 
United  States  were  based  on  a  4-per-cent.  interest  assumption 
and  this  rate  has  been  very  generally  employed  in  cases  where 
the  Actuaries'  table  of  mortality  was  used  to  compute  pre- 
miums. With  the  American  Experience  table  a  rate  of  3^ 
per  cent,  has  generally  been  used  until  recent  years.  Since 
about  the  year  1900  a  number  of  companies  have  been  using 
a  3-per-cent.  interest  assumption.  Where  policies  are  made 
participating  it  makes  little  difference  what  rate  is  used  so 
long  as  it  is  not  too  large,  since  all  money  earned  above  the 
rate  assumed  is  returned  to  the  policyholder  in  the  form  of 
dividends ;  and  the  lower  the  rate  used  the  better  will  a  com- 
pany be  able  to  weather  a  period  of  financial  depression. 

The  second  rule  referred  to  above  stated  that  matured 
claims  would  be  paid  at  the  end  of  the  policy  year.  Some 
time  must  clearly  be  determined  upon  in  order  to  know  how 
long  the  money  will  draw  interest  before  being  paid.  If  it 
can  be  assumed  that  there  will  be  a  fairly  even  distribution  of 
deaths  throughout  the  year  then  on  the  average  deaths  will 
occur  at  the  middle  of  the  year.  The  payment  of  claims, 
then,  based  on  this  assumption,  would  occur  six  months  after 
death.  In  the  early  experience  of  life-insurance  companies 
this  was  not  far  from  the  truth,  for  it  took  about  three 
months  to  make  proof  of  death,  and  old  policies  allowed  the 
company  three  months  after  proof  before  the  claim  was  pay- 
able. At  the  present  time,  however,  due  largely  to  the  factor 


146          THE  PRINCIPLES  OF  LIFE  INSURANCE 

of  competition,  claims  are  paid  promptly,  one  prominent  com- 
pany, for  instance,  advertising  that  over  ninety-five  per  cent, 
of  its  claims  are  paid  within  one  day  of  receipt  of  proofs  of 
death.  The  importance  of  this  consideration  lies  in  the  fact 
that  the  company  loses  nearly  six  months'  interest  on  the  sum 
paid.  For,  if  deaths  occur  on  the  average  at  the  middle  of 
the  year  and  proof  of  death  requires  one  week,  as  is  likely 
to  be  the  case  nowadays,  the  claim  is  paid  on  the  average  at 
nearly  the  middle  of  the  year.  But  by  the  assumption  used 
in  computing  the  premium  the  money  is  supposedly  held  until 
the  end  of  the  policy  year.  Computing  premium  rates  at 
4  per  cent.,  this  would  mean  a  loss  of  $20  on  a  $1,000 
policy.  The  assumption  that  claims  are  paid  at  the  end  of 
the  year,  however,  is  maintained  in  the  face  of  this  fact  for 
two  reasons:  (1)  because  of  the  great  amount  of  labor  and 
expense  involved  in  computing  new  tables  based  on  the  more 
correct  assumption;  and  (2)  because  the  mortality  table,  as 
explained  in  the  preceding  chapter,  allows  sufficient  margin  to 
cover  this  deficiency  and  make  the  position  of  the  company 
perfectly  safe.  , 

Another  assumption  made  by  the  companies  in  their  rate 
computations  is  that  the  death  rate  is  uniform  throughout 
the  year.  Thus,  if  out  of  100,000  persons  of  a  certain  age 
600  die  within  one  year,  the  assumption  is  that  fifty  die  the 
first  month,  fifty  the  second  month,  and  so  on  during  the 
year.  The  fact  is  that  the  death  rate  is  constantly  decreasing 
up  to  about  age  10  when  it  begins  gradually  to  increase, 
and  this  increase  continues  at  a  constantly  accelerating  rate 
to  the  end  of  life.  This  assumption  is  of  financial  impor- 
tance to  the  company  only  in  case  of  policies  paid  for  by 
premiums  at  intervals  more  frequent  than  one  year.  In  the 
case  of  annual  premiums,  since  all  premiums  are  paid  in  ad- 
vance, the  money  is  on  hand  at  any  time  during  the  year  to, 
pay  insurance  costs.  In  the  case  of  monthly  premiums,  how- 
ever, if  only  one-twelfth  of  the  annual  premium  is  collected 
in  advance,  but  one-sixth  of  the  total  year's  mortality  should 
occur  during  the  first  month,  the  company  will  not  have  the 


PRINCIPLES  UNDERLYING  RATE-MAKING       147 

funds  on  hand  to  pay  losses.  This  situation  can  occur  only 
during  the  first  ten  years  of  life  when  the  mortality  rate  is 
constantly  decreasing  and  it  necessitates  special  treatment  in 
case  of  insurance  of  children  under  age  10.  But  after  age 
10  the  mortality  rate  is  increasing  and  the  discrepancy  be- 
tween the  assumption  of  uniform  deaths  and  the  actual  situ- 
ation is  favorable  to  the  company  and  therefore  presents  no 
dangers,  for  the  company  will  now  collect  one-twelfth  of  the 
premium,  but  will  experience  less  than  one-twelfth  of  the 
year's  losses  during  the  first  month. 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  Elements  of  Life  Insurance,  ed.  3,  19-23, 

38-39. 

FACKLER,  EDWARD  B.,  Notes  on  Life  Insurance,  12-13,  51-52. 
MOIR,  HENRY,  Life  Assurance  Primer,  chaps.  4,  5. 


CHAPTEE  XIII 

THE  NET  SINGLE  PREMIUM 

By 
BBUCE  D.  MUDGETT 

Classification  of  Premiums  as  Single  and  Periodic. — 

Life-insurance  policies  may  be  purchased  by  a  single  premium, 
an  annual  premium,  or  a  premium  paid  weekly,  monthly, 
quarterly,  or  semi-annually.  Of  these  the  annual  premium 
is  by  far  the  most  important  and  may  continue  until  the 
death  of  the  policyholder  or  the  maturity  of  the  policy  or  may 
be  limited  to  a  definite  number  of  years  as  in  a  twenty-pay- 
ment life  policy  and  a  twenty-payment  thirty-year  endow- 
ment. In  the  twenty-payment  life  policy,  for  instance,  the 
premiums  continue  for  twenty  years  provided  death  does  not 
intervene  before  this  period  has  elapsed  and  after  the  twenty 
payments  have  been  made  the  policy  requires  no  further 
payments  and  matures  whenever  death  occurs.  Few  insur- 
ance contracts,  with  the  exception  of  annuities,  are  purchased 
by  single  premiums,  although  they  may  be  so  purchased  and 
the  companies  will  quote  single  premium  rates  for  any  kind 
of  policy.  Nevertheless,  in  taking  up  the  subject  of  rate 
computation  in  life  insurance  it  is  necessary  to  begin  with  a 
thorough  study  of  the  single  premium,  inasmuch  as  it  fur- 
nishes the  method  of  approach  in  determining  annual  pre- 
miums. 

Classification  of  Premiums  as  Net  and  Gross. —  The  pre- 
mium charged  for  a  life-insurance  contract  is  supposed  to 
cover  all  contingencies  the  company  is  likely  to  meet,  and 
these  may  be  conveniently  grouped  into  two  classes,  viz,  mor- 
tality and  expenses.  Mortality  has  reference  to  that  part  of 
the  premium  which  provides  for  the  occurrence  of  the  event 

148 


THE  NET  SINGLE  PREMIUM  149 

or  risk  insured  against,  while  the  second  element  covers  the 
costs  incident  to  the  management  of  a  company,  such  as 
salaries,  rents,  commissions,  etc.,  which  may  be  fairly  charged 
against  a  particular  policy.  In  computing  premiums  mor- 
tality costs  are  always  determined  first  and  to  this  mortality 
element  is  added  an  amount,  determined  by  a  more  or  less 
scientific  method,  called  loading,  which  provides  for  expenses, 
and  from  these  calculations  is  determined  the  premium 
charged  the  policyholder.  According,  therefore,  as  to  whether 
the  "premium"  in  question  is  "loaded"  or  not,  it  may  be 
classed  as  net  or  gross.  The  net  premium  makes  provision 
for  mortality  losses  only,  while  the  gross  or  "  office  "  premium 
contains  this  element  plus  an  addition,  or  a  "loading,"  for 
expenses.  The  gross  premium  is  the  only  one  known  to  the 
policyholder,  but  before  it  is  obtained  an  actuary  must  have 
ascertained  the  net  premium.  If,  therefore,  the  gross  annual 
premium  is  the  ultimate  object  of  the  study  of  rate  compu- 
tation this  study  must  begin  by  first  determining  the  net 
single  premium.  From  the  latter,  as  will  be  shown  later,  the 
net  annual  premium  can  be  found.  Following  this  it  will  be 
possible  to  study  the  various  methods  of  loading  in  order  to 
ascertain  the  gross  annual  premium. 

In  the  preceding  chapter  it  was  shown  that  the  computation 
of  premium  rates  on  any  kind  of  policy  required  information 
as  to  (1)  the  amount  of  the  policy,  (2)  the  age  of  the  insured, 
(3)  the  mortality  table  to  be  used  in  measuring  the  risk  in- 
curred, and  (4)  the  rate  of  interest  assumed  on  funds  pos- 
sessed by  the  insurance  company.  In  the  computations  that 
follow,  risks  will  always  be  measured  according  to  the  Ameri- 
can Experience  table  of  mortality;  the  rate  of  interest  as- 
sumed will  be  3  per  cent,  and  the  face  value  of  the  policy 
will  be  $1,000  unless  otherwise  stated.  The  age  of  the  in- 
sured will  be  stated  in  each  instance. 

Term  Insurance. —  Term  insurance  is  the  simplest  type  of 
contract  issued  insuring  against  premature  death.  Term 
policies  usually  run  for  five,  ten,  fifteen,  or  twenty  years,  and 
promise  to  pay  the  sum  insured  if  the  policyholder  should  die 


150          THE  PRINCIPLES  OF  LIFE  INSURANCE 

within  this  period,  nothing  being  paid  if  death  does  not  occur 
during  the  designated  term.  Term  policies  are' therefore  a 
distinct  type  of  temporary  insurance.  Attempts  have  been 
made  to  popularize  a  one-year  term  policy  which  is  renewable 
from  year  to  year  at  the  option  of  the  insured,  thereby  grant- 
ing current  cost  insurance  which  is  paid  for  at  the  beginning 
of  each  year,  the  premium  furnishing  protection  for  that  year 
only,  and  a  different  rate  being  chargeable  for  the  following 
year's  insurance.  This  type  of  policy  offers  an  excellent  op- 
portunity to  explain  the  simple  elements  of  rate-making.  Sup- 
pose, therefore,  that  the  net  single  premium  is  to  be  ascer- 
tained on  a  renewable  one-year  term  insurance  of  $1,000  on  a 
life  aged  45.  Immediate  use  will  now  be  found  for  two 
of  the  assumptions  used  in  rate-making  which  were  mentioned 
in  the  preceding  chapter,  viz,  that  premiums  are  paid  in 
advance  and  that  matured  claims  are  paid  at  the  close  of 
the  policy  year.  Accordingly,  it  is  required  to  find  the 
amount  of  money  which  must  be  paid  in  at  the  beginning 
of  the  year  by  a  policyholder  in  order  to  enable  the  company 
to  return  $1,000  at  the  close  of  the  year  in  case  the  policy 
has  matured.  The  question  must  now  be  asked:  What 
is  the  risk  insured  against?  It  follows  from  the  definition 
of  term  insurance  that  it  is  the  chance  of  dying  during 
the  year.  This  will  be  determined  by  means  of  the  mortal- 
ity table.  This  shows  that,  of  74,173  persons  living  at 
age  45,  828  die  during  the  year.  Suppose  now  that  an  insur- 
ance company  should  issue  74,173  one-year  term  policies  to 
persons  aged  45.  If  the  mortality  experienced  among  this 
group  coincides  with  the  experience  indicated  in  the  mor- 
tality table  there  will  be  828  deaths  during  the  year.  Since 
each  of  these  deaths  represents  a  liability  of  $1,000  to  the 
company,  and  since  the  claims  are  payable  at  the  close  of 
the  year,  the  company  must  have  on  hand  at  that  time 
$828,000  to  pay  claims.  But  this  entire  amount  need  not 
have  been  collected  from  the  policyholders  since  they  were 
required  to  pay  their  premiums  at  the  beginning  of  the  year 
and  the  company  was  able  to  invest  the  money  at  interest  for 


THE  NET  SINGLE  PREMIUM  151 

one  year  and  earn  3  per  cent,  thereon.  For  every  $1  col- 
lected, therefore,  the  company  will  have  on  hand  $1.03  when 
the  claims  mature.  Eight  hundred  and  twenty-eight  thou- 
sand dollars,  therefore,  bears  the  same  ratio  to  the  amount  of 
money  which  must  be  collected  from  the  group  of  74,173 
persons  as  $1.03  bears  to  $1.  Put  in  the  form  of  a  proportion 
this  may  be  stated  as  follows: 

8  28  OOP  _  1  -08 
x  ~  T.OO 

1.03  x  —  1.00  X  828000 

=  803883.50 


X  may  here  be  defined  as  the  present  value  of  $828,000  dis- 
counted for  one  year  at  3  per  cent.  This  amount  of  money 
($803,883.50)  therefore  must  be  paid  at  the  beginning  of  the 
year  by  the  group  of  74,173  persons  in  order  that  there  may 
be  on  hand  at  the  end  of  the  year  sufficient  funds  to  pay 
$1,000  for  each  of  the  828  deaths.  To  obtain  the  premium 
which  each  individual  should  pay,  it  is  only  necessary  to  di- 
vide the  total  fund  by  the  number  contributing,  viz  : 
803,883.50  -f-  74,173  =  $10.84 

The  "  net  single  premium  "  for  a  one-year  term  insurance 
at  age  45,  or  the  amount  of  money  that  must  be  paid  at  the 
beginning  of  the  year  to  supply  each  individual's  contribu- 
tions to  the  death  losses  of  the  group  for  the  year  is,  therefore, 
$10.84. 

This  same  problem  may  be  approached  in  a  different  way 
and  a  formula  stated  for  determining  costs.  The  original 
assumption  required  the  insurance  of  a  group  of  74,173  per- 
sons of  identical  age.  But  this  is  impossible  to  obtain  in 
practice.  Suppose  now  that  it  is  desired  to  insure  a  single 
individual  aged  45  against  death  during  the  year  and  that  the 
net  single  premium  for  this  insurance  is  to  be  ascertained. 
Clearly,  if  the  event  occurs  against  which  protection  is  de- 
sired, it  will  cost  the  insurance  company  $1,000.  But  what 
is  the  probability  of  death  occurring  during  the  year?  It 
has  been  shown  that  828  persons  aged  45  die  out  of  a  group 
of  74,173.  Reference  to  the  discussion  of  the  theory  of  proba- 
bilities in  Chapter  XI  will  show  that  this  is  equivalent  to 


152       THE  PRINCIPLES  OF  LIFE  INSURANCE 

saying  that  the  probability  of  death  during  the  forty-fifth 
year  is  7%^3.  The  cost  to  a  single  person,  therefore,  will  be 
74i73  of  $1,000.  But  since  this  value  needs  to  be  on  hand 
at  the  end  of  the  year  and  money  earns  3  per  cent,  interest, 
the  amount  to  be  paid  in  by  the  insured  will  be  the  value  of 
the  above  amount  discounted  for  one  year  at  3  per  cent. 
This  result  is  found  as  follows: 

YftkX  1000 —  1.03  =  $10.84 

It  must  not  be  assumed  from  this  that  an  insurance  com- 
pany can  insure  a  single  person;  instead,  it  must  always  deal 
with  a  group  sufficiently  large  to  guarantee  a  close  approxima- 
tion of  its  actual  mortality  experience  with  the  table  mor- 
tality. It  must,  as  was  explained  earlier,  be  sure  of  the 
operation  of  the  law  of  average.  But  it  does  not  need  to 
insure  this  entire  group  with  the  same  kind  of  policy  or  at 
the  same  age.  The  law  will  operate  if  only  the  entire  group 
of  policyholders  including  all  ages  and  all  kinds  of  policies 
be  sufficiently  large. 

If  the  method  here  used  in  determining  the  cost  of  this 
insurance  is  carefully  studied  it  will  be  found  to  embody  the 
following  process :  Multiply  the  probability  insured  against 
by  the  amount  of  the  policy  and  divide  by  the  amount  of  $1 
at  the  assumed  rate  of  interest  for  one  year;  and  from  this 
formula  it  is  possible  to  construct  a  general  formula  to  apply 
in  computing  all  net  single  premiums,  viz,  the  probability 
insured  against  multiplied  by  the  amount  of  the  policy  multi- 
plied by  the  value  of  $1  discounted  for  the  period  the  money 
is  held.  One  dollar  discounted  for  one  year  at  3  per  cent, 
equals  |$f  ==.970874.  Multiplying  by  this  factor  gives  the 
same  result  as  dividing  by  1.03.  This  formula  will  be  used 
hereafter  in  computing  net  single  premiums.  It  would  be 
possible  now  to  compute  the  net  single  premium  paid  at  the 
beginning  of  the  second  year  for  the  second  year's  insurance 
under  our  renewable  one-year  term  policy  issued  at  age  45. 
The  probability  of  death  during  this  year  is  the  yearly  proba- 
bility of  death  at  age  46,  or  yf  f-J-g  and  the  cost  of  the  year's 
insurance  would  be : 


THE  NET  SINGLE  PREMIUM  153 


X  1000  X  .970874 

In  like  manner,  the  yearly  cost  of  insurance  can  be  com- 
puted for  any  age  from  10  to  95,  inclusive,  the  years  covered 
by  the  American  Experience  table. 

While  much  emphasis  has  here  been  placed  upon  the  one- 
year  term  policy  because  of  its  appropriateness  in  developing 
the  elementary  principles  of  rate  computation,  the  fact  must 
not  be  lost  sight  of  that  one-year  term  policies  are  rarely 
sold.  The  usual  term  policies  extend  for  five  years  or  longer, 
and  this  fact  brings  complications  into  the  matter  of  rate- 
making.  Suppose  it  is  desired  to  compute  the  net  single 
premium  for  a  five-year-term  insurance  issued  at  age  45,  i.e. 
the  amount  of  money  which,  paid  in  a  single  sum  at  age 
45,  will  purchase  insurance  against  death  at  any  time  within 
the  next  five  years.  Two  facts  are  apparent  upon  a  mo- 
ment's reflection:  (1)  the  premium  is  paid  only  once,  in 
a  single  sum  at  the  inception  of  the  risk;  (2)  death  claims 
will  be  paid  at  the  end  of  the  year  in  which  they  occur, 
and  not  at  the  end  of  the  five-year  period.  This  latter 
fact  has  an  important  bearing  on  the  interest  which  will 
be  earned  and  therefore  on  the  method  of  computing  the 
five  years'  cost.  Manifestly,  the  cost  cannot  be  correctly  de- 
termined by  multiplying  the  total  probability  of  dying  dur- 
ing the  five  years  by  the  face  value  of  the  policy  and  discount- 
ing this  amount  in  one  operation  since  some  of  the  money 
collected  will  draw  interest  for  only  one  year  while  another 
part  will  be  earning  interest  for  five  years.  It  is  necessary 
to  compute  the  cost  of  each  year's  mortality  separately.  The 
probabilities  insured  against  in  this  case  are  the  chances  that 
a  person  aged  45  will  die  during  the  first  year  following, 
during  the  second  year,  the  third  year,  etc.  These  prob- 
abilities are  respectively  ^fffj,  yff^,  ?|ffy,  -^ffj  and 
Each  of  these  figures  must  be  multiplied  by  the 


amount  insured  and  by  the  present  value  of  $1.00  discounted 
in  each  instance  by  the  length  of  time  the  money  is  held.  The 
money  available  for  the  first  year's  death  claims  will  be  held 
one  year;  for  the  second  year's  claims,  two  years,  etc.,  the 


154          THE  PRINCIPLES  OF  LIFE  INSURANCE 

funds  for  the  last  year's  claims  being  held  five  years.  The 
discounted  values  of  one  dollar  for  one,  two,  three,  four  and 
five  years  at  3  per  cent,  interest  are  respectively  $.970874, 
$.942596,  $.915142,  $.888487  and  $.862609.  The  cost  of  the 
five  years'  insurance,  therefore,  can  be  shown  as  follows : 

828 

of     1st.    year's    insurance. 


74,173 

;.888487— $10.733— —    "       "     4th. 


j  L  i  o 

l  "       "     5th. 


74,173' 

Net  single  premiumr=$53.861  cost  of  5  years'  insurance. 

This  computation  shows  that  $53.86  deposited  with  the  com- 
pany and  placed  at  3  per  cent,  interest  will  furnish  enough 
money  to  pay  all  the  death  claims  on  this  five-year  term 
policy. 

Whole-Life  Insurance. —  A  whole-life  policy  continues  for 
the  whole  of  life  and  promises  to  pay  its  face  value  upon 
the  death  of  the  insured  to  his  estate  or  his  beneficiary.  There 
is  a  possibility  that  the  insured  may  live  to  an  advanced  age 
and  this  must  be  taken  into  consideration  in  computing  the 
premium.  This  policy  is  like  the  term  contracts  just  con- 
sidered with  the  exception  that,  instead  of  being  limited  to  a 
definite  number  of  years,  it  continues  for  the  largest  possible 
length  of  life  and  will  certainly  be  paid  at  some  time.  Since 
the  American  Experience  table  of  mortality  assumes  that 
all  persons  die  by  the  end  of  the  95th  year,  the  maximum 
possible  age  for  which  insurance  against  death  needs  to  pro- 
vide in  this  case  will  be  95.  The  net  single  premium  on  a 
whole-life  policy  issued  at  age  45  must,  therefore,  provide 
against  the  possibility  that  the  insured  will  die  during  his 
45th  year,  his  46th  year  and  so  during  every  year  up  to  and 
including  his  95th.  The  separate  probabilities  insured  against 


THE  NET  SINGLE  PREMIUM 


155 


will  be  fifty-one  in  number,  i.e.  for  the  years  45  to  95  inclu- 
sive. 

The  chance  of  dying  in  each  separate  year  will  be  multi- 
plied by  the  face  value  of  the  policy  ($1,000)  and  this 
amount  discounted  for  the  number  of  years  between  the  issue 
of  the  policy  (i.e.  the  payment  of  the  single  premium)  and 
the  payment  of  death  losses,  thus: 

828 

xl,000x.970874=10.837955=:cost  of  mortality  during  age  45 

"  "  "  "  46 

"  "  "  "  47 

"  "  "  "  48 

"  «  «  "  49 

"     "  "  "  "  50 

"     "  "  «  "  51 
=1  1.1  11092=    "     " 


— 

^- 
4,173 


74,1  /  3 

Q97 

~-li- 

QR9 

_-^^ 
74,173 

i^L 

1  04.4 

±1^- 

i5?i 
74,173 


74,173 
1,260 
74J73 


1,394 
74,173 

1,468 
74,173 

1,546 
74,173 

1,628 
74,173 


Xl3OOOx.701380=zll.914562r=r    " 


XlJOOOX-641862=12.703456z= 


Xl,000x.605016z=13.279307= 


52 
53 
54 
55 
56 
57 
58 
59 
60 
61 


156        THE  PRINCIPLES  OF  LIFE  INSURANCE 

1  713 
^-^Xl,000x.587395=13.565686=rcost  of  mortality  during  age  62 

1,800 
74,173Xl'0(>  x'57028e 


y^^X  1,000  X  .553676=14.100737= 
'72>°r°3X  1,000  X  .521893=14.5648*9=     "     " 

Q    ]  KQ 

£-X  1,000  X.  506692=14.741770=     "     " 
74,17o 

o  24S 
*™    .     \/  I  000  v  4-01014.       I4.<37fil4.n           "      "              " 

"     64 
"     65 
"     66 

"     67 
"           "     68 
"     69 

"     70 
«     71 

«     72 
"     73 
"     74 
"          "     75 
"     76 
"     77 

((                       («           >TO 

"     79 
"     80 
"     81 
«           «     82 

'74  173      1>uuuX.4yllM4:  —  14.0/t)14U  — 
Z,o2i                          d77fififi      1404^108            "      "              " 

74,17«j 

74,173"  1)0° 
y^X  1,000  X  .450189=14.858003=     "     "           " 

2  487 
•^jT^X  1,000  X.  437077=  14.655070=     "     " 

2  505 

^,wv/tf            _     r\/-v/\  yx     jiO/lO^fi           14491101                    (t          ft                       te 

74,173Al'00°A^ 

-I^-X  1,000  X.  411987=13.89  1571=     "     " 
74,173 

•  v  1  flfin  v  TQOOR7       lTr?c»91rl4.            "      "              " 

/4,173 
2  431 

•  vl  OnfVv   IRfin?       19797R40            "      <(              ff 

2  369 

74,173  Al'°° 

9  9Q1 
•^^-Xl,OOOX.366045=11.306123=     "     " 
74,  17  o 

2,196                                      105216^3         "     "           " 

74,173"   '        /*'  ' 

9  091 
."'"M      v  i  r>Afi  vx   oj.E:nT9         Q  79fi74fi            "      "              " 

IA  i-7oA  -l,OOOA.o4oUJ^  —   y./^o/4b  — 
/  4,1/0 

74,173A 
^-^X  1,000  X.  325226-  7.962607= 

THE  NET  SINGLE  PKEMIUM  157 

•1)648Xl,OOOx. 315754=  7.015526=cost  of  mortality  during  age  83 
1)47°:X  1,000  X. 306557=  6.075510=     "     "  "  "  "     84 


74,173 

1  9Q9 

•X  1,000  X.  297628=  5.184304=     "     "  "  "  "     85 


74,173' 

•^TT^X  1,000  X.  288959=  4.339859=     "     "  "  "  «     86 

/4,173 

qqq 

—  X  1,000  X.  280543=  3.528867=     "     "          "  "          "     87 

74,173 


74,  17  o 

555 
74,173 

385 
74,173 

246 
74,173 

137 
74,173 

58 
74,173 

18 
74,173 

3 
74,173 


X  1,000  X. 272372=  2.732056=  "  "  "  "  88 

X  1,000  X. 264439=  1.978667=  "  "  "  "  «  89 

X  1,000  X. 256737=  1.332611=  "  "  "  "  "  90 

X  1,000  X. 249259=     .826685=  "  "  "  "  "  91 

X  1,000  X.  241999=     .446980=  "  "  "  "  "  92 

X  1,000  X. 234950=     .183721=  "  "  «  "  "  93 

X  1,000  X. 228107=     .055356=  "  "  "  "  "  94 

X  1,000  X. 221463=     .008957=  "  "  "  "  «  95 


Net    single    premium=$504.584931. 

This  amount,  $504.59,  is  the  discounted  value  of  all  the 
death  claims  payable  from  age  45  until  the  mortality  table 
assumes  that  all  persons  will  have  died  and  is,  therefore,  the 
net  single  premium  which  will  purchase  a  whole-life  policy 
issued  at  age  45.  It  is  a  matter  of  common  observation  that 
there  are  men  who  outlive  their  ninety-fifth  year,  but  since 
the  computations  assume  that  the  insured  will  not  have  sur- 
vived this  age  and  since  sufficient  money  will  have  been  ac- 
cumulated to  pay  the  claim  at  the  close  of  the  ninety-fifth 
year  of  life,  it  is  the  general  practice  to  consider  the  policy 
matured  at  this  time  and  to  pay  the  claim  whether  the  insured 
be  dead  or  alive, 


158          THE  PRINCIPLES  OF  LIFE  INSURANCE 

Pure  Endowments. —  A  pure-endowment  contract  prom- 
ises to  pay  the  insured  value  in  case  the  holder  survives  a  cer- 
tain fixed  period.  Thus,  a  ten-year  pure  endowment  issued 
at  age  45  will  pay  the  holder  the  amount  named  in  the  con- 
tract if  he  be  living  ten  years  from  the  date  of  issue.  The 
mortality  table  shows  that  74,173  persons  are  living  at  age  45, 
and  that  64,563  are  still  living  at  age  55,  leaving  9,610  as 
the  number  dying  during  the  ten  years.  A  policy  thus  in- 
suring against  survival  during  this  period  must  itself  provide 
•fiifl  °^  the  amount  of  the  contract  at  the  end  of  the  period. 
Or  it  may  be  stated  in  this  way:  the  probability  insured 
against  is  -fJIff  and  since  the  money  paid  as  a  single  pre- 
mium will  be  held  ten  years  before  the  policy  matures  the 
formula  for  determining  the  net  single  premium  is: 
f fifl  X  1000  X  .744094  =  $647.69 

The  decimal,  .744094,  is  the  present  value  of  one  dollar 
discounted  for  ten  years  at  3  per  cent. 

A  clear  distinction  must  be  made  between  a  pure  endow- 
ment and  a  savings-bank  account  which  is  left  to  accumulate 
at  an  agreed  rate  of  interest.  The  insured  cannot  get  pos- 
session of  the  money  invested  in  a  pure  endowment  before 
the  expiration  of  the  endowment  period.  If  he  should  die  dur- 
ing this  period  all  the  money  paid  is  lost,  i.e.  it  goes  to  swell  the 
fund  which  will  be  paid  to  the  survivors.  A  savings-bank 
account  on  the  other  hand  is  not  lost  through  death  of  the 
investor.  This  fact  makes  it  possible  to  divide  the  $1,000 
which  will  be  paid  in  case  of  survival  through  the  endowment 
period  into  two  funds,  one  of  which  might  be  called  the  in- 
vestment fund,  and  the  other  the  speculative  fund.  The  in- 
vestment fund  in  a  ten-year  pure  endowment,  issued  at  age 
45,  will  equal  $647.69  plus  interest  compounded  for  the  ten 
years  at  3  per  cent,  thus : 

647.69  X  1-3439  =  $870.43 

This  $870.43  is  the  amount  which  would  be  obtained  by 
investing  the  net  single  premium  of  this  pure  endowment 
policy  at  3  per  cent,  interest  for  ten  years.  The  remainder 
of  the  $1,000,  or  $129.57,  comprises  the  survivor's  share  of 


THE  NET  SINGLE  PREMIUM  159 

the  amounts  forfeited  by  those  policyholders  who  died  before 
their  policies  matured.  The  latter  amount  is  here  called  the 
speculative  fund.  The  possibility  of  thus  losing  the  entire 
amount  of  one's  investment  by  death  before  the  endowment 
period  has  expired,  makes  the  pure  endowment  a  policy  that 
finds  little  favor  with  the  insuring  public.  For  this  reason 
it  is  usually  combined  with,  or  constitutes  a  feature  of  some 
other  kind  of  policy. 

Endowment  Insurance.  —  The  most  usual  combination  in 
which  pure  endowments  figure  is  technically  known  as  endow- 
ment insurance.  This  policy  is  popularly  referred  to  as  an 
endowment.  It  promises  to  pay  a  certain  sum  to  the  insured 
in  case  he  should  die  within  the  term  of  the  policy  or  a  like 
sum  at  the  end  of  the  term  in  case  of  survival.  Analysis  of 
this  contract  shows  that  it  includes  the  pure-endowment  fea- 
ture just  discussed  and,  in  addition,  insurance  against  death 
during  the  term  of  the  endowment.  For  illustration,  a  five- 
year  endowment-insurance  policy  issued  at  age  45  will  pay  the 
sum  insured  if  the  policyholder  die  during  the  first,  the  second, 
the  third,  the  fourth,  or  the  fifth  years,  and  it  will  pay  the 
same  sum  if  he  survive  the  fifth  year.  The  cost  of  this  insur- 
ance, therefore,  will  equal  the  following: 

828 

'Xl,OOOX.970874—  10.837955,  cost  of  1st.  year's  insurance. 

—  10.776447     "       "  2d.       "  " 

xl,000v.915142—  10.734007     "      "  3d.       "  " 


/4,173 
oo 

Xl5OOOX-888487—  10.732805     "       "  4th.     " 


Xl,OOOX-862609—  10.780723     "       "  5th.     " 


74,173 

927 
747173 

JL5 — X1>00°X-862609— 811.798884     "     of  5 -year  pure  endowment. 
74,173 


Net  single  premium=$865.660821   for  5-year  endowment  insurance. 

Contracts  known  as  "  semi-endowments  "  or  "  double  en- 
dowments "  are  sometimes  issued.    They  differ  from  the  pol- 


160        THE  PRINCIPLES  OF  LIFE  INSURANCE 

icy  just  explained  only  in  the  fact  that  the  amount  due  in 
case  the  insured  should  survive  the  term  of  the  policy  (i.e.  the 
endowment  element)  is  one-half,  or  is  double,  the  amount 
paid  in  event  of  maturity  by  death.  The  cost  of  a  five-year 
semi-endowment  insurance  of  $1,000  at  age  45,  therefore, 
would  differ  from  the  cost  of  the  policy  just  computed  only 
by  the  cost  of  the  pure  endowment,  which  in  this  case  would 
be  as  follows: 

•ffffA  X  500  X  .862609  =  $405.899442 
This  amount,  added  to  the  cost  of  the  five-years'  term  insur- 
ance, would  give  the  net  single  premium  for  the  semi-en- 
dowment. 

BIBLIOGRAPHY 

The  bibliography  on  Premium  Computation  is  deferred  to  the 
end  of  the  chapter  on  The  Net  Level  Premium  inasmuch  as 
the  bibliography  quoted  does  not  analyze  separately  the  net 
single  from  the  net  level  premium. 


CHAPTEE  XIV 

THE  NET  SINGLE  PREMIUM  (CONTINUED) 

By 
BRUCE  D.  MUDGETT 

The  premiums  computed  thus  far  relate  to  contracts  which 
>  embody  only  two  kinds  of  risks,  the  risk  of  death  and  the  risk 
of  survival.     These  two  types  are  sometimes  referred  to  as 
insurance  and  endowments,  since  insurance  as  such  is  gener- 
ally needed  against  premature  death  while  endowments  have 
:the   character  of  investments   accumulated  for  the   future. 
Every  life-insurance   contract  covers  pne  or  both  of  these 
features,  viz,  protection  against  death  or  accumulation  in 
case  of  survival. 

Installment  Insurance. —  In  the  policies  studied  thus  far 
-it  has  also  been  assumed  that  the  face  value  of  the  policy 
(generally  $1,000  or  multiples  of  that  amount)  is  payable  at 
maturity  in  a  single  sum.     But  it  has  become  a  common 
practice    to    make    provision    for    the    payment    of    policies 
in  periodic  installments.     Thus  there  are  policies  paid  in 
i  monthly  installments  extending  over  a  period  of  years,  or  in 
iten,  fifteen  or  twenty  yearly  installments.     These  contracts 
•  differ  in  cost  from  those  paid  in  a  single  cash  sum  and  it  is 
)  necessary  to  determine  wherein  this  difference  lies.     Such  in- 
stallment contracts  are  of  two  kinds ;  one  stating  that  the  face 
value,  $1,000,  will  be  paid  in  a  definite  number  of  install- 
iments,  and  the  other  maturing  regularly  as  a  single-payment 
;  policy  but  giving  the  insured  or  his  beneficiary  the  option  of 
^  choosing    the    installment-payment    plan.     A    policy    which 
:  promises  payment  of  $100  on  the  death  of  the  insured  and 
$100  per  year  thereafter  until  ten  payments  have  been  made 
is   an    example   of    the   first;    the    contract   in   the   second 

161 


162 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


case  would  mature  for  $1,000  payable  at  once,  but  would 
allow  the  beneficiary  to  receive  in  lieu  thereof  a  certain  sum 
annually  for  ten  years,  this  sum  not  being  $100  but  rather 
the  amount  which  can  be  purchased  by  $1,000  in  hand  at 
maturity. 

1  In  the  case  of  the  first  contract  it  is  evident  that  the  com- 
pany is  going  to  pay  out  a  total  of  only  $1,000,  but  during  the 
ten  years  given  the  company  in  which  to  pay  this  sum,  it  will 
be  earning  interest  on  the  funds  in  its  possession.  It  must 
have  on  hand,  therefore,  at  the  time  of  maturity,  only  such 
funds  as,  with  interest  added,  will  yield  $100  at  each  of  the 
ten  annual  periods.  The  payments  are  made  as  follows: 
$100  immediately,  $100  at  the  end  of  one  year,  $100  at  the 
end  of  two  years,  etc.,  the  tenth  payment  being  made  at  the  end 
of  nine  years.  The  first  $100  will  be  paid  at  once  upon  the 
maturity  of  the  contract  and  therefore  earns  no  interest.  A 
part  of  the  funds  will  d-raw  interest  for  one  year,  another  part 
for  two  years,  etc.,  the  last  portion  drawing  interest  for  nine 
years.  Consequently  the  funds  which  must  be  available  at 
the  maturity  of  the  contract  will  equal  $100  plus  such  amounts 
as  with  interest  for  one  year,  two  years,  three  years,  etc.,  will 
respectively  equal  sums  of  $100.  These  amounts  are  the  dis- 
counted values  of  $100  for  one,  two,  three  years,  etc.  The 
present  value  of  these  ten  payments  is  found  as  follows: 


$100  paid  immediately 
100  one  year  hence  = 
100  two  years  hence  = 
100  three  years  hence  = 
100  four  years  hence  = 
100  five  years  hence  — 
100  six  years  hence  = 
100  seven  years  hence  = 
100  eight  years  hence  = 
100  nine  years  hence  = 

Present    value    of    $1,000    in    ten    installments— $878.6120 

If  the  company  therefore  has  $878.61  on  hand  at  the  time* 
the  policy  matures  and  continues  to  earn  3  per  cent,  interest 


PRESENT 
VALUE 

— 

100.00 

100 

X 

.970874 

— 

97.0874 

100 

X 

.942596 

— 

94.2596 

100 

X 

.915142 

— 

91.5142 

100 

X 

.888487 

—  - 

88.8487 

100 

X 

.862609 

— 

86.2609 

100 

X 

.837484 

— 

83.7484 

100 

X 

.813092 

— 

81.3092 

100 

x 

.789409 

— 

78.9409 

100 

X 

.766417 

= 

76.6417 

THE  NET  SINGLE  PREMIUM  163 

>on  all  funds  in  its  possession  it  will  be  able  to  pay  the  ten 
installments  of  $100  each  as  they  come  due.  To  determine 
the  net  single  premium  for  a  policy  so  paid,  it  is  necessary 
to  regard  the  policy  as  having  a  face  value  of  $878.61,  instead 
of  $1,000.  Thus,  a  term  policy,  a  whole-life  policy,  a  pure- 
endowment  or  an  endowment  insurance  might  be  paid  in  ten 
installments,  and  the  only  change  from  the  computations  al- 
ready made  would  consist  in  the  substitution  of  $878.61  for 
$1,000  as  the  amount  of  insurance. 

Where  the  policy  matures  for  $1,000  but  gives  the  further 
option  of  receiving  payment  in  installments,  it  is  clear  that 
the  premium  must  provide  for  $1,000  payable  in  a  single 
cash  sum  at  maturity  since  the  insured  or  beneficiary  may 
choose  this  option.  There  will  be  no  difference  therefore  in 
the  computation  of  the  net  single  premium  for  this  policy 
from  the  usual  $1,000  policy.  But  since  $878.61  only  is  nec- 
essary at  maturity  to  provide  ten  installments  of  $100  each, 
$1,000  in  hand  at  maturity  will  enable  the  company  to  pay 
ten  installments,  each  greater  than  $100.  A  single  proportion 
will  show  how  the  amount  of  these  payments  may  be  deter- 
mined. Since  $878.61  will  provide  installments  of  $100  each, 
$1,000  will  provide  installments  greater  than  $100  in  the 
same  proportion  that  $1,000  is  greater  than  $878.61.  Thus, 
letting  x  equal  the  amount  of  the  installment  to  be  found, 
we  have : 

$1,000:878.61  : :  x  :  100 
or     i o  o  o  «_ 


878-  6  f    ~~    100 

x  _  looooo 

878-61 

x  =  113.81 

A  policy  maturing  for  $1,000  and  giving  the  option  of  receiv- 
ing it  in  ten  annual  installments  could  therefore  pay  $113.81 
in  each  installment.  By  the  principles  here  laid  down  the 
cost  can  likewise  be  determined  for  a  contract  paid  in  any 
number  of  installments,  such  as  five,  fifteen  or  twenty. 

The  contracts  explained  thus  far  have  invariably  involved 
but  one  life.     Life-insurance  companies,  however,  will  issue 


164        THE  PRINCIPLES  OF  LIFE  INSURANCE 

policies  covering  risks  on  two  or  more  lives,  or  joint-life  poli- 
cies as  they  are  called.  Especially  in  the  field  of  partnership 
or  corporation  insurance  has  the  joint-life  policy  been  used  in 
recent  years.  But  the  computation  of  costs  on  joint-life  risks 
will  carry  us  more  deeply  into  actuarial  science  than  it  is  de- 
sired here  to  enter,  since  the  purpose  of  our  premium  analyses 
is  merely  to  give  an  adequate  idea  of  the  risk  involved  in  the 
most  usual  types  of  policies.  Premium  computations  there- 
fore will  not  be  made  for  ordinary  joint-life,  last-survivor  anc 
contingent  or  survivorship  insurances.1 

Annuities, —  The  remaining  class  of  contracts  to  be  anal- 
yzed are  known  as  annuities.  Annuities  promise  to  pay  the 
possessor  a  stated  income,  usually  at  intervals  of  one  year  dur- 
ing the  lifetime  of  said  person.  It  will  be  seen,  therefore,  thai 
they  furnish  a  type  of  investment  whereby  the  recipient  whose 
sole  dependence  is  upon  invested  capital,  can  be  assured  of  an 
income  for  life.  And  since  the  income  is  payable  only  during 
the  life  of  the  one  person,  the  annuitant,  a  single  annuity  on 
one  life  does  not  furnish  group  protection,  but  each  life  must 
necessarily  be  covered  by  a  separate  contract. 

Annuities  covering  a  single  life  are  of  two  kinds,  immedi- 
ate and  deferred.  Immediate  annuities,  sometimes  referred  to 
as  the  ordinary  life  form,  may  be  temporary,  i.e.  limited  to  a 
term  of  years,  may  continue  for  the  whole  of  life,  or  may 
promise  a  certain  number  of  payments  irrespective  of  the 
question  whether  the  recipient  be  living  or  not.  The  latter 
contracts  are  sometimes  spoken  of  as  guaranteed  annuities  or 
annuities  with  a  guaranteed  minimum  number  of  payments. 
The  cost  of  each  of  these  contracts  will  be  considered  in  turn. 

An  immediate  temporary  annuity  of  $100  purchased,  say,  at 
age  70  and  continuing  for  a  period  of  ten  years,  will  promise 
to  pay  the  annuitant  one  hundred  dollars  one  year  from  date 

i  The  computation  of  costs  for  joint-life  contracts  is  effected  by 
the  application  to  the  mortality  table  of  the  law  of  compound  proba- 
bilities in  determining  the  probability  that  joint-lives  will  fail,  that 
they  will  survive,  etc.  The  results  are  equally  scientific  with  those 
obtained  in  dealing  with  single  lives,  but  the  development  of  joint- 
life  formulae  cannot  be  undertaken  within  the  scope  of  this  book. 


THE  NET  SINGLE  PKEMIUM  165 

of  purchase  if  then  living,  and  one  hundred  dollars  at  each 
anniversary  of  that  date  if  still  living  until  ten  payments  have 
been  made.  The  cost  of  this  contract  will  be  the  sum  of 
money  paid  at  the  time  of  purchase,  namely  age  70,  which  will 
furnish  these  annual  payments,  and  the  net  cost,  which  it  is 
proposed  here  to  determine,  will  be  the  amount  necessary  to 
provide  merely  for  the  payments  of  the  sums  promised  to  the 
annuitant  without  assessing  against  the  contract  anything  for 
expenses.  The  formula  used  in  computing  net  single  pre- 
miums on  insurances  can  again  be  used  here,  namely,  net 
cost  will  equal  the  risk  or  probability  insured  against  multi- 
plied by  the  sum  insured  (the  amount  of  the  annuity)  multi- 
plied by  the  value  of  $1.00  discounted  for  the  time  the  money 
is  held.  Since  therefore  a  payment  is  made  to  the  annuitant, 
if  surviving,  at  the  end  of  each  year,  the  cost  for  each  year 
must  be  determined  separately  and  these  sums  added  to  obtain 
the  total  cost.  The  probability  insured  against  is  the  proba- 
bility that  the  annuitant  will  survive  through  the  first  year, 
through  the  second  year,  the  third  year,  etc.  It  will  be  seen 
therefore  that  the  annuity  under  consideration  is  equivalent 
to  a  series  of  ten  pure  endowments,  one  maturing  in  one  year 
from  date  of  purchase,  one  in  two  years,  one  in  three  years, 
etc.,  until  ten  have  been  paid.  The  probability  that  the  first 
annuity  payment  will  be  made,  if  determined  from  the 
American  Experience  table,  will  equal  the  probability  that  a 
man  aged  70  will  survive  one  year,  or  expressed  in  the  form  of 
a  fraction,  33569-  The  $100  paid  in  case  of  survival  is  paid 
one  year  from  the  date  of  purchase  of  the  annuity  and  there- 
fore the  net  cost  of  the  first  payment  will  be  the  value  of  this 
sum  discounted  for  one  year  at  3  per  cent,  and  multiplied 
by  the  probability  of  survival.  Thus  the  total  operation  for 
the  first  year  is  as  follows : 

ffllfXlOOX  •970874  =  $91-07==net  cost  of  first  an' 
nuity  payment. 

In  like  manner  the  net  cost  for  the  remaining  nine  pay- 
ments will  be  found  by  multiplying  the  probability  of  surviv- 
ing through  two,  three,  four  years,  etc.,  by  the  amount  of  the 


166         THE  PRINCIPLES  OF  LIFE  INSURANCE 

annuity  of  $100,  discounted  respectively,  two,  three,  four 
years,  etc.  The  entire  computation  for  the  ten  years  is  as 
follows  : 

0/1   1  7Q 

£g^XlOOX-970874=$91.068681=net  cost  of    1st.  annuity  payment. 

33  730 

._1_X100X  .942596=  82.433465=  "     "      "     2d.  "  " 

oo,oby 

01  040 

=  74.131508=  •'     '«      •'     3d. 


OQ    7QQ 

.    X10°X'888487=  66.201715=  "     "      "    4th. 
38,569 


=  58.679956=  "     "      "    5th. 
-837484=  51.594434=  "     "      "    6th. 
=  44.966819=  "     "      "    7th. 


1  fi  Qfil 

'       X10OX-789409=  38.808328=  "  "  "    8th. 

16,670  Xlo0x766417_  33  125493_  «  «  «    9th. 

-744094=  27.924023=  "  "  "  10th. 


38,569 


Net  cost=$568.934422  for  a  10-year  term  annuity. 

The  temporary  annuity  at  age  70,  therefore,  will  cost  net, 
$568.94,  which  sum  is  composed  of  the  net  costs  of  each  of 
the  separate  yearly  payments. 

If  the  contract  issued  at  age  70  promises  to  pay  an  annuity 
for  the  whole  of  life  the  computations  must  continue  until  the 
life  surely  fails  and  this  occurs,  according  to  the  American 
Experience  table,  during  the  ninety-fifth  year.  The  net  cost 
of  a  whole-life  annuity,  or  an  ordinary  life  annuity  as  it  is 
usually  called,  will,  therefore,  equal  the  net  cost  of  a  series 
of  pure  endowments,  the  first  maturing  at  age  71  and  the  last 
at  age  95,  since  all  lives  are  assumed  by  the  table  to  have" 
surely  failed  before  the  beginning  of  the  ninety-sixth  year. 
The  computation  of  the  cost  of  this  annuity  is  as  follows,  the 
first  ten  years  being  the  same  as  for  the  term  annuity  just 
computed  : 


THE  NET  SINGLE  PREMIUM  167 

o/»  1  7Q 

xlOOx.970874==$91.068681=net  cost  of     1st.  year's  annuity. 
X  100  X.  942596=  82.433465=  "      "       "      2d.       " 
X  100  X.  915142=  74.131508=  "      "       "      3d.       " 


38,o69 

X  100  X.  888487=  66.201715=  "      "       "     4th.       " 


26  237 

^-J-X  100  X.  862609=  58.679956=  "      "       "    5th.       " 
00,00" 

90  7fil 

''   X  100  X.  837484=  51.594434=  "   "   "  6th.   " 
X  100  X.  8  13092=  44.966819=  "   ".   "  7th.   •" 


77:  X  100  X.  789409=  38.808328=  "      "       "     8th. 
oo,oo9 

16,670  Xlo0x  j66417==  33.125493=  "      "       "    9th. 
38,o09 

14  474 

X  100  X.  744094=  27.924023=  "      "       "  10th. 


12  383 

~—  —  X  100  X.  722421=  23.194118=  "   "   "  llth. 

38,569 

o'tlX  100  X.  701380=  18.947025=  "      "       "  12th. 
.  680951=  15.188938=  "      "       "  13th. 


6>9^-XlOOx.661118=  11.921688=  "      "       "  14th. 


38,569 

<fo4-8,fn  X  100  X  .641862=     9.128090=  "      "       "  15th. 

oo,oby 

4'193  X  100 X. 623167=     6.774713=  "      "       "  16th. 


38,569 
3,079 
38,569 
2,146 
38,569 
1,402 
38,569 

847 
38,569 

462 
38,569 


X  100  X. 605016=  4.822900=  "  "  "  17th. 

X  100  X. 587395=  3.268298=  "  "  "  18th. 

X  100  X. 570286=  2.073015=  "  "  "  19th. 

X  100 X. 553676=  1.215908=  "  "  "  20th. 

X 100 X. 537549=  .643905=  "  "  "  21st. 


168       THE  PRINCIPLES  OF  LIFE  INSURANCE 
216 


38,569 

21 
38,569 

3 
38,569 


X  100 X. 521893=  .292279=net  cost  of  22d.  year's  annuity. 

X 100  X. 506692=  .103785=  "  "       "    23d.       "  " 

X 100  X. 491934=  .026785=  "  "       "  24th.       " 

X 100 X. 477606=  .003715=  "  "       "  25th.       " 


Net  cost=$666.546584  for  a  life  annuity  at  age  70. 


This  sum  of  $666.55  therefore  represents  the  net  amount 
which,  paid  at  age  70,  will  enable  the  insurance  company  to 
pay  $100  per  year  to  the  annuitant  during  life. 

If  this  same  annuity  guaranteed  that  the  first  five  payments 
were  to  be  certain,  i.e.  not  affected  by  the  death  of  the  bene- 
ficiary before  their  completion,  this  fact  would  have  to  be 
taken  into  consideration  in  computing  the  net  cost.  The  dis- 
tinction would  lie  in  the  fact  that  these  five  payments  would 
not  be  affected  by  death,  or  to  put  it  in  actuarial  terms,  the  risk 
would  equal  certainty  or  one.  The  net  cost  of  the  first  five 
payments  would  therefore  be : 

lXlOOx.970874=$97.0874=net  cost  of  1st.  year's  annuity. 
IX 100  X. 942596=  94.2596=  "       "      "     2d.      " 
IX 100  X. 915142=  91.5142=  "       "      "     3d.      " 
IX  100  X. 888487=  88.8487=  "       "      "  4th.      " 
IX 100 X. 862609=  86.2609=  "       "      "  5th.      " 

Total  cost  of  annuity  certain=$457.9708. 

All  payments  following  and  including  the  sixth  would  be 
dependent  on  the  probability  of  survival  and  their  net  cost 
would  therefore  be  computed  in  the  same  manner  as  in  the 
previous  problem. 

Deferred  Annuities. —  Immediate  life  annuities  are  pur- 
chased by  persons  of  advanced  age,  and  contemplate  the  pay- 
ment of  benefits  at  periodic  intervals  following  the  date  of 
issue.  It  is  necessary,  therefore,  that  the  person  consid- 
ering investment  in  such  a  contract  shall  have  accumulated 
the  fund  with  which  to  make  such  purchase.  This  fund  is 


THE  NET  SINGLE  PREMIUM     .  169 

presumably  created  from  savings  over  the  productive  period 
of  a  man's  lifetime.  The  experience  of  probate  courts  leads 
to  the  conclusion,  however,  that  most  men  dying,  after  age 
60  leave  little  or  no  capital  accumulated.  Realizing  this 
and  knowing  how  easy  it  is  to  forget  the  future  some  men  are 
interested  in  an  annuity  contract  that  will  furnish  an  income 
during  old*  age,  as  do  the  contracts  just  described,  but  which 
can  be  purchased  by  annual  sums  laid  aside  during  their 
productive  years;  in  other  words  a  contract  that  will  enable 
them  to  create  this  fund  by  annual  payments,  say,  between 
ages  40  and  70,  which  fund  can  then  be  returned  to  them 
as  an  annuity  after  age  70.  The  deferred  annuity  offers  this 
opportunity.  It  bears  a  close  resemblance  to  the  old-age  pen- 
sions now  operated  by  a  number  of  governments  and  private 
corporations  under  which  plans  money  is  accumulated  year 
by  year  in  small  amounts  either  from  the  wages  of  the  pen- 
sioners, or  is  donated  by  the  employer  or  the  state  and  is 
paid  periodically  during  the  lifetime  of  the  pensioner  after  he 
attains  a  stated  age. 

The  deferred  annuity  is  the  only  type  of  single-life  annuity 
sold  by  insurance  companies  which  can  be  purchased  by  an 
annual  premium.  In  theory,  of  course,  it  is  possible  to  pay 
for  such  a  contract  by  a  single  premium  paid  at  the  date  of 
purchase  of  the  contract  but  in  practice  such  is  not  ordinarily 
done.  It  is  necessary,  however,  in  this  instance,  as  in  the 
computations  previously  made,  to  compute  the  net  single  pre- 
mium before  determining  the  net  annual  premium. 

If,  therefore,,  it  is  desired  to  find  the  net  single  premium 
payable  at  age  40  which  will  purchase  the  right  to  receive  a 
life  annuity  of  $100  beginning  at  age  70,  there  are  two  pos- 
sible ways  of  approaching  the  problem.  In  the  first  place  it 
may  be  asked,  what  is  the  amount  of  money  that  must  have 
been  accumulated  by  the  company  by  the  time  the  annuity 
begins  ?  This  is  equivalent  to  asking  how  much  money  must 
be  on  hand  at  age  70  to  furnish  $100  annually  during  life,  the 
first  payment  to  be  made  when  the  annuitant  reaches  age  70. 
The  problem  at  this  point  is,  therefore,  identical  with  that  of 


170        THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  immediate  life  annuity  just  discussed,  with  the  single 
exception  that  here  the  first  $100  payment  is  made  at  age  70 
while  in  the  former  case  the  first  payment  was  made  at  age 
71.  If  therefore  the  insurance  company  has  on  hand  at  the 
time  the  annuitant  becomes  70  years  of  age  the  amount  of 
money  necessary  to  purchase  an  immediate  life  annuity  the 
first  payment  being  at  age  71  plus  an  additional  $100  for 
the  payment  made  on  arriving  at  age  70,  or,  taking  the  fig- 
ures from  our  previous  computations,  $666.55  +  $100.00  or 
$766.55,  this  amount  may  be  considered  as  the  net  cost  at  aye 
70  of  a  life  annuity  the  first  payment  of  which  is  made  at 
that  age. 

It  is  now  necessary  to  determine  how  much  must  be  paid 
to  the  insurance  company  by  the  purchaser  who  takes  such  a 
contract  when  40  years  of  age.  The  cost  of  this  contract  is 
ordinarily  computed  on  the  assumption  that  the  single  pre- 
mium paid  at  age  40,  or  the  annual  premium  paid  from  ages 
40  to  70  is  a  sum  laid  aside  for  use  after  age  70,  the  pur- 
chaser relinquishing  any  right  to  his  contributions  in  case  he 
fails  to  survive  to  that  age.  By  this  means  he  is  able  in 
case  of  survival  to  share  proportionately  in  all  funds  relin- 
quished by  other  annuitants  who  failed  to  live  to  age  70. 
Clearly  the  chance  that  a  man  aged  40  will  collect  any  por- 
tion of  his  annuity  is  the  chance  that  he  will  survive  this 
period.  In  other  words  it  may  be  stated  that  the  period  of 
deferment  is  a  pure-endowment  period. 

It  is  now  possible  to  state  the  problem  in  actuarial  terms. 
In  case  of  survival  from  age  40  to  age  70  the  annuitant  must 
have  standing  to  his  credit  the  then  present  value  of  the  whole- 
life  annuity  pa}rments  beginning  at  age  70.  This  amount 
was  found  to  be  $766.55.  The  amount  payable  at  age  40 
which  will  furnish  this  sum  if  living  at  age  70  will  be  the 
present  value  of  this  sum  discounted  for  thirty  years  at  the 
assumed  interest  rate  and  multiplied  by  the  probability  of 
surviving  the  thirty-year  period  of  deferment,  viz : 
ff-fff  X  766.55  X  .411987  =  $155.94734 

The  problem  of  computing  the  net  single  premium  for  the 


THE  NET  SINGLE  PREMIUM  171 

deferred  annuity  in  question  can  be  approached  in  a  differ- 
ent way.  It  consists  of  dealing  with  each  separate  annual 
income  payment  by  itself  instead  of  obtaining  the  combined 
value  at  age  70  of  all  these  payments  and  then  discounting 
this  value  in  one  operation  to  its  value  at  age  40.  By  con- 
sidering each  annuity  payment  separately  it  is  possible  to  find 
the  amount  of  money  to  be  paid  as  a  single  premium  at  age 
40  which  will  furnish  a  payment  at  age  70  if  living,  another 
at  age  71  if  living  and  so  on  until  according  to  the  mortality 
table  the  annuitant  will  have  surely  died. 

Thus  if  $100  is  to  be  paid  at  age  70,  if  surviving,  its  cost  or 
present  value  at  age  40  will  be  equal  to  the  present  value  of 
$100  discounted  for  thirty  years  and  multiplied  by  the  proba- 
bility of  surviving  to  age  70.  In  like  manner  the  present  value 
at  age  40  of  the  second  annuity  of  $100  will  equal  $100  dis- 
counted for  thirty-one  years  and  multiplied  by  the  probability 
of  surviving  from  age  40  to  age  71.  This  process  will  be 
continued  to  the  end  of  the  mortality  table  and  the  net  single 
premium  for  the  deferred  annuity  will  be  equal  to  the  total 
sum  of  these  present  values.  The  computations  are  shown 
herewith  : 


78,106 
f?fi  2*?7 


.411987=$20.344054 

x  100  X.  399987=  18.527040 

X  100  X.  388337=  10.770296 

X  100  X.  377026=  15.081330 

X  100  X.  366045=  13.468109 

XlOOX,355383=  11.937859 

X  100  X.  345032=  10.496384 


21  T^O 

*  7  .  x  100  X  .334583=  9.137141 

/8,106 

.  325226=  7.895181 


172        THE  PEINCIPLES  OF  LIFE  INSURANCE 


16,670 
78,106 
14,474 
78,106 
12,383 
78,106 


=  6.739071 
X  100  X. 306557=  5.680877 
X  100  X. 297628=  4.718623 
3.854587 


6,955 
78,106 


78,106 
78,106 


XlOOX 


X  100  X 


x  100  X 


2,146 

1,402 
78,106 

847 
78,106 

462 
78,106 

216 


X  100  X 


x  100  X 


=  3.090046 

.272372=  2.425354 

.264439=  1.857025 

.256737=  1.378253 

.249259=  .982599 

.241999=  .664904 

.234950=  .421734 

.228107=  .247365 

.221463=  .130996 

=  .059461 


XlOOX. 208750=       .021114 


21 


X  100  X.  202670 


.005449 


XlOOX. 196767=       .000756 


Total  $155.935608=Net  Single  Premium. 

The  total  obtained  equals  the  net  single  premium  for  the 
annuity  purchased  at  age  40  with  benefits  deferred  until  age 
70.  Comparison  of  this  result  with  that  found  by  the  first 
method  used  will  show  that  they  are  identical.  For  analyt- 
ical purposes  the  former  method  has  an  advantage  over  the 
latter  in  bringing  out  in  a  more  striking  manner  the  pure- 


THE  NET  SINGLE  PREMIUM  173 

endowment  nature  of  the  period  of  deferment  from  age  45 
to  age  70  wherein  the  insured  loses  all  in  case  of  death  before 
age  70. 

Of  course,  a  deferred  annuity  can  be  computed  on  a  differ- 
ent basis  to  eliminate  the  speculative  element  whereby  all 
accumulations  are  lost  through  death  before  age  70.  The  old- 
age  pensions  issued  by  governments  and  private  corporations 
sometimes  include  a  proviso  that  in  case  of  death  or  with- 
drawal before  the  first  annuity  is  paid,  the  insured  may  re- 
ceive a  return  of  all  his  individual  contributions  with  interest 
compounded  at  a  nominal  rate.  Likewise  the  old  line  com- 
panies arrive  at  a  somewhat  similar  result  by  attaching  a  pro- 
vision that  in  case  of  prior  death  the  insured  shall  have  re- 
turned to  him  all  the  premiums  paid  in,  without  interest. 
Thus,  if  a  particular  annuity  such  as  is  here  considered  were 
costing  $15  a  year  between  ages  40  and  70  and  the  insured 
died  after  having  paid  fifteen  premiums  his  estate  would  re- 
ceive fifteen  times  $15  or  $225.  This  return  premium  fea- 
ture would,  of  course,  cost  an  extra  premium  beyond  what  was 
necessary  to  purchase  the  deferred  annuity  by  itself. 

BIBLIOGRAPHY 

The  bibliography  on  Premium  Computation  is  deferred  to  the 
end  of  the  chapter  on  The  Net  Level  Premium  inasmuch 
as  the  bibliography  quoted  does  not  analyze  separately  the 
net  single  from  the  net  level  premium. 


CHAPTEE  XV 

THE  NET  LEVEL  PREMIUM 

By 
BRUCE  D.  MUDGETT 

The  Level,  or  Periodic,  Premium  System. —  Insurance 
policies  may  be  purchased  by  a  single  cash  sum  or  by  periodic 
payments  made  weekly,  monthly,  quarterly,  semi-annually,  or 
annually.  The  method  of  computing  the  net  single  premium 
has  been  described  in  Chapters  XIII  and  XIV.  Therein 
it  was  explained  that  policies  are  ordinarily  purchased  by  an- 
nual or  periodic  premiums  but  that  the  determination  of  the 
latter  is  possible  only  after  the  single  premium  has  been  as- 
certained. It  requires  but  a  brief  comparison  to  show  why 
most  insured  persons  choose  the  annual-  rather  than  the 
single-premium  method  of  paying  for  insurance.  The  net. 
single  premium  on  a  $1,000  whole-life  policy  issued  at  age 
35  (American  Experience  3  per  cent,  basis)  is  $419.88  while 
the  net  annual  level  premium  is  only  $21.08.  Two  reasons 
favor  the  choice  of  the  latter  method  of  payment.  In  the 
first  place  most  persons  insure  to  protect  an  income  the  con- 
tinuation of  which  during  their .  lifetime  enables  them  to  as- 
sume certain  definite  family  or  business  responsibilities,  the 
cessation  of  which  income  by  death  would  leave  these  obliga- 
tions unfulfilled.  It  is  a  man's  earning  power  which  enables 
him  safely  to  marry  or  to  engage  in  business,  for  the  majority 
of  people  do  not  obtain  their  capital  by  inheritance.  It  is 
from  current  income,  therefore,  that  insurance  premiums 
must  ordinarily  be  paid.  If  the  protection  of  a  $4,000  in- 
come requires  $10,000  of  insurance,  this  amount  on  the  sin- 
gle-premium plan  for  whole-life  insurance  at  age  35  would 
cost  $4,198.80  while  on  the  annual-premium  plan  it  would 

174 


THE  NET  LEVEL  PEEMIUM  175 

mean  ah  outlay  of  $210.80  per  year.  The  former  sum  is 
clearly  impossible  of  payment  from  a  single  year's  income, 
while  the  latter  would  occasion  no  special  hardship. 

A  second  reason  for  the  choice  of  annual-  rather  than  single- 
premium  payments  for  life  insurance  lies  in  the  reduced 
cost  of  a  policy  purchased  by  the  former  in  case  of  early  death. 
If  the  insured  in  the  above  illustration  should  die  within  one 
year  after  the  issue  of  his  policy  this  insurance  would  cost 
him  $4,198.80  under  the  one  plan  and  but  $210.80  under  the 
other.  This  difference  cannot  be  lightly  overlooked.  It  will 
require  the  payment  of  twenty  annual  premiums  before  the 
amount  paid  in  will  equal  the  single  premium  and  therefore 
the  annual  plan  of  premium  payments  is  the  cheaper  to  the 
policyholder  whenever  death  occurs  before  the  twentieth  year 
of  insurance  is  begun.  There  is  a  corresponding  disadvan- 
tage in  the  annual-premium  plan  if  the  insured  lives  beyond 
the  payment  of  his  twentieth  premium  for  he  will  then  pay 
more  than  would  have  been  the  case  with  the  single  premium. 
In  other  words  among  the  policyholders  of  an  insurance  com- 
pany for  everyone  who  pays  in  less  than  the  amount  of  the 
single  premium  there  must  be  someone  who  pays  correspond- 
ingly more  than  that  amount. 

Analogy  Between  Periodic  Premiums  and  Annuities. — 
If  a  policyholder  is  given  the  choice  of  paying  for  his  insurance 
by  a  single  or  an  annual  premium  the  amount  of  the  latter 
must  be  determined  on  such  a  basis  that  in  a  large  group  of 
policyholders  the  company  will  receive  the  same  amount  of 
money  under  the  one  plan  as  under  the  other.  Since,  .there- 
fore, the  manner  of  computing  the  net  single  premium  is 
known,  the  problem  in  hand  at  this  point  will  be  solved  by 
finding  a  net  annual  premium  mathematically  equivalent  to 
the  net  single  premium.  In  order  to  do  this  it  is  necessary 
to  inquire  into  the  circumstances  affecting  the  payment  of  an- 
nual premiums.  They  are  paid  regularly  during  the  life  of 
some  person,  generally  the  insured,  or  for  a  limited  number 
of  years,  but  always  cease  upon  his  or  her  death.  This  is  the 
definition  of  an  annuity,  as  stated  in  the  previous  chapter. 


176       THE  PKINCIPLES  OF  LIFE  INSURANCE 

Annual  premiums,  therefore,  are  annuities  but  they  differ 
in  three  important  respects  from  the  annuities  thus  far  con- 
sidered. (1)  In  the  first  place  they  are  annuities  paid  by 
the  insured  to  the  company,  while  regular  annuities  are  paid 
by  the  company  to  the  insured.  To  be  sure  both  annual  pre- 
miums and  annuities  are  based  on  the  life  of  the  same  person, 
viz,  the  insured,  but  this  does  not  affect  the  principle  involved. 
(2)  Annuities,  moreover,  were  found  to  be  purchased,  ordi- 
narily, by  a  single  premium,  i.e.  a  single  cash  sum.  If  an- 
nual premiums  are  analogous  to  annuities,  how,  then,  are 
annual  premiums  purchased?  Or,  to  state  the  proposition 
directly,  in  what  way  does  the  company  return  value  received 
for  the  annual  premiums  it  collects?  Obviously,  not  by  a 
cash  sum  to  the  insured  upon  the  issue  of  the  policy. 
Rather  it  pays  for  them  with  the  policy  which  promises  cash 
upon  the  happening  of  some  future  event  and  this  future 
promise  of  money  has  a  present  value  which  can  be  expressed 
in  money.  This  "  present  value  "  is  comparable  to  the  cash 
payment  for  annuities. 

(3)  A  third  and  fundamental  difference  between  annual 
premiums  and  annuities  exists  with  reference  to  the  time  when 
they  respectively  begin.  It  will  be  remembered  that  the  cost 
of  an  immediate  life  annuity  is  computed  on  the  assumption 
that  the  first  payment  of  annual  income  is  received  one  year 
from  the  date  of  issue  of  the  contract.  But  it  is  impossible  to 
issue  a  life-insurance  polkry,  allowing  the  premium  to  be  paid 
on  any  such  basis.  The  law  of  contracts  requires  the  payment 
of  a  consideration  as  a  necessary  preliminary  to  the  creation 
of  the  contract  and  the  policy  states  that  it  is  issued  "  in 

consideration  of  the  payment  of  $ and  a  like  amount 

annually  thereafter."  Hence  the  first  annual  premium  is  al- 
ways payable  when  the  policy  is  issued,  and  not  one  j'ear  later, 
as  is  the  case  with  annuities.  The  series  of  annual  premiums 
is,  therefore,  equal  to  the  usual  annuity  plus  one  payment 
made  immediately.  The  distinction  between  the  two  is  ex- 
pressed by  calling  the  annual  premium  a  life  annuity  due. 
Life  annuities  due  are  not  sold  as  annuity  contracts  and  the 


THE  NET  LEVEL  PKEMIUM  177 

jole  purpose  of  this  term  is  to  have  a  convenient  expression 
to  describe  an  annual  premium  in  terms  of  an  annuity.  The 
problem  stated  on  page  175  may  now  be  restated  in  the  fol- 
lowing terms:  The  net  annual  level  premium  will  be  a  life 
annuity  due  equivalent  to  the  net  single  premium. 

Continuous  and  Limited  Premiums. —  It  was  found  in  the 
discussion  of  life  annuities  on  page  166  that  the  cost  of  a 
whole-life  annuity  based  on  the  American  Experience  table 
provides  for  the  payment  of  annuities  in  some  cases  as  late  as 
age  95,  for  according  to  the  table  there  will  be  three  of  the 
assumed  group  alive  at  that  age.  Are  we  to  assume  therefore, 
since  annual  premiums  are  life  annuities  due,  that  they  are 
invariably  paid  to  age  95  if  the  insured  lives  to  that  age  ?  Of 
course  this  is  not  the  case.  Annual  premiums  are  never  paid 
after  the  termination  of  a  contract,  whether  it  terminates  by 
expiry  or  by  maturity;  and  a  large  majority  of  insurance 
contracts  are  certain  to  be  closed  before  the  holder  reaches 
age  95.  The  whole-life  policy  is  the  sole  contract  insuring 
against  death  which  may  continue  until  the  insured  is  age  95. 
Term  and  endowment  contracts  usually  do  not  extend  beyond 
age  65  or  75  of  the  insured.  Therefore  the  majority  of  an- 
nual premiums  will  be  life  annuities  due,  not  for  the  whole  of 
life  but  for  a  temporary  period,  the  maximum  length  of  which 
will  be  the  maximum  length  of  the  insurance  contract. 

With  respect  to  the  period  during  which  premiums  are  paid 
insurance  policies  are  of  two  kinds:  policies  with  continuous 
premiums  payable  throughout  the  life  of  the  contract;  and 
so-called  limited-payment  policies,  where  the  premiums  are 
limited  to  a  term  shorter  than  the  maximum  life  of  the  con- 
tract. For  instance,  a  whole-life  policy  with  continuous  pre- 
miums, technically  known  as  an  ordinary  life  policy,  will  re- 
quire payment  of  premiums  until  the  contract  matures  by 
death  or  until  the  insured  reaches  age  96,  at  which  time  the 
policy  matures  irrespective  of  death.  A  thirty-year  endow- 
ment-insurance policy  with  continuous  premiums  will  necessi- 
tate their  payment  for  thirty  years  only  or  for  a  shorter  time 
in  case  the  contract  matures  by  death  in  less  than  thirty 


178       THE  PRINCIPLES  OF  LIFE  INSURANCE 

years.  But  a  policy  such  as  the  following  is  often  sold  —  for 
example,  a  twenty-payment  life  or  a  twenty-payment  thirty- 
year  endowment  insurance.  A  twenty-payment  life  policy  will 
mature  and  its  face  value  be  paid  only  upon  death  or  at  age  96 
but  premiums  will  continue  for  a  maximum  of  twenty  years 
and  fewer  than  twenty  will  be  paid  in  case  of  death  within  this 
limit.  In  the  two  illustrations  here  cited  annual  premiums 
will  be  life  annuities  due,,  not  for  the  term  of  the  insurance 
•contract,  but  limited  in  each  case  to  twenty  years.  It  is  pos- 
sible, therefore,  in  view  of  these  facts  again  to  modify  the 
definition  given  for  the  net  annual  premium.  The  new  state- 
ment will  be:  The  net  annual  level  premium  is  a  life  an- 
nuity due  for  the  premium-paying  period  which  is  equivalent 
to  the  net  single  premium  on  the  particular  policy. 

Computation  of  the  Net  Annual  Level  Premium. —  1. 
Term  Insurance. —  In  computing  net  annual  level  premiums 
it  is  first  necessary  to  ascertain  the  net  single  premium.  This 
has  been  done  in  Chapters  XIII  and  XIV  for  the  more  usual 
types  of  policies.  The  second  step  will  be  to  define  carefully 
the  premium-paying  period  over  which  the  annual  premium  is 
to  be  paid  and  for  which  the  life  annuity  due  is  to  be  ascer- 
tained. Suppose  it  is  desired,  therefore,  to  compute  the  net 
annual  level  premium  which  will  purchase  a  five-year  term 
insurance  of  $1,000  at  age  45,  American  Experience  3  per 
cent,  basis.  It  was  found  on  page  154  that  the  net  single  pre- 
mium on  this  policy  was  $53.86.  Beginning  at  date  of  issue 
the  annual  premium  will  be  paid  over  a  five-year  period,  or 
until  prior  death,  and  is  therefore  a  five-year  term  annuity 
,due. 

Since  the  amount  of  the  annual  premium  is  the  unknown 
quantity  it  will  be  impossible  to  proceed  directly  to  the  com- 
putation of  its  present  value,  but  it  is  feasible  to  take  any 
.-assumed  premium,  such  as  $1.00,  and  compute  the  present 
value  of  an  annuity  due  for  this  amount.  An  annuity  due  of 
$1.00  on  the  policy  in  question  will  be  equal  to  a  term  an- 
nuity for  four  years  plus  $1.00  paid  immediately  and  its  pres- 
ent value  is  computed  in  the  following  manner : 


THE  NET  LEVEL  PREMIUM  179 

$1  due  immediately=$l.  000000 

70  OAK 

~X  IX.  970874=  .960036 
X  l  X  -942596=  .92  1297 


,173 

.  915142=     .883811 


X  !  X  .888487=     .847256 
,7o 

Present  value=$4.612400 

The  present  value  of  a  frve-year  term  annuity  due  of  $1.00 
at  age  45  is,  therefore,  equal  to  $4.6124  and  the  annuity  due, 
or  annual  premium,  of  $1.00  for  this  period  will  purchase 
any  policy  the  present  value,  or  net  single  premium,  of  which 
is  equal  to  $4.6124.  But  the  net  single  premium  on  the  pol- 
icy in  question  was  found  to  be  $53.86.  If  now  the  present 
value  of  the  $1.00  annuity  due  be  divided  into  the  net  single 
premium  on  this  policy  the  resultant  factor  will  show  how 
many  times  the  annual  premium  of  $1.00  must  be  taken  to 
obtain  an  annual  premium  the  present  value  of  which  will 
equal  the  net  single  premium,  or  $53.86.  Stated  in  other 
words,  the  annual  premium  desired  is  as  many  times  $1.00  as 
the  net  single  premium  on  the  policy  is  times  the  present 
value  of  a  $1.00  annuity  due  for  the  premium-paying  period. 
From  this  analysis  it  is  possible  to  state  a  general  rule  for  as- 
certaining the  net  annual  level  premium  on  any  policy  as 
follows  :  Divide  the  net  single  premium  by  the  present  value 
of  a  life  annuity  due  of  $1.00  for  the  premium-paying  period. 
Performing  this  computation,  it  is  found  that  the  net  annual 
level  premium  on  a  five-year  term  insurance  of  $1,000  issued 
at  age  45  is  $11.68,  thus  : 

4  .6  162°4°  "  $11-^8 

2.  Ordinary  life  insurance.  —  The  net  single  premium 
for  a  whole-life  policy  of  $1,000  issued  at  age  45  is  $504.59 
according  to  the  figures  on  page  157.  To  find  the  net  annual 
level  premium  this  sum  must  be  divided  by  the  present  value 
of  a  life  annuity  due  for  the  whole  of  life,  since  premiums 


180       THE  PRINCIPLES  OF  LIFE  INSURANCE 

are  paid  continuously  through  the  life  of  this  policy.  The 
method  of  ascertaining  the  present  value  of  the  life  annuity 
due  of  $1.00  follows  herewith : 

$1  due  immediately  =  1.00000000 
73,345  _ 


TA  ,1,0  ~ - ~~"  w-^—     -96003604 
/  4,1  /  o 


X  1  X  .942596=     .92129727 

71  627 

ir^-XlX.  915142=     .88372961 
74,173 

.84725674 
.81179888 


74,173 

''xlX. 837484—  .77729192 
67,841 


74)173-X1X.813092=     .74367997 


.71090765 


65,706  7flfi.li?  fi78Q9«qq 

74,173  X1XJ(K  -6789289 

H2!!!  X  1 X  .744094=  .64768771 

63  364 

uo,ou-±  722491 —  fil7144Rd 

74,173 X1X'7^421"  >51714 


.58725552 
74*173 XlX>680951==     -55798634 


74173'N~'N'~~" .52930975 

|^|||x  IX. 641862=  .50118940 
.47360288 


74,173 

&A.  74S 

.44652894 


.41995816 
51,230 


^  *.  ^  .w.  v-w», —  .39388661 
7  4, 1 7  o 


THE  NET  LEVEL  PREMIUM  181 

AQ  QJ.1 

^-^  X  1  X  .553676=  .36831364 
74,17«3 

X  l  X  .537549=  .34323619 
X.  521893=  .31867466 


,17o 

X  l  X  -506692=  .29465097 


X  1  X  .491934=  .271  19277 


74,  17o 

If^fl  X  1  X  .477606=  .24834894 
74,1  to 

X  1  X  .463695=  .22616798 

X  1  X  .450189=  .20472240 

xlX.  437077=  .18410468 

X  1  X  .424346=  .16441098 

XlX.411987=  .14573097 

X  IX.  399987=  .12813411 

X  IX.  388337=  .11167444 

XlX.  377026=  .09637995 

X  1  X  .366045=  .08226673 

X  1  X  .355383=  .06934887 

X  1  X  .345032=  .05760224 

X  1  X  .334983=  .04705469 

X  1  X  .325226=  .03772153 
74,173 

^^  X  1  X  .315754=  .02960739 

I  *»  5  I/O 

5,485 


74,173 


>02266950 


182        THE  PKINCIPLES  OF  LIFE  INSUKANCE 
4,193 


74,173 
3,079 

74,173 
2,146 


74,173 
462 


X IX. 297628=  .01682491 

XlX. 288959=  .01199499 

XlX. 280543=  .00811677 

XlX. 272372=  .00514831 

XlX. 264439=  .00301969 

XlX. 256737=  .00159913 

X  1  X  .249259=  .00072587 

XlX. 241999=  .00025775 


74,173 

-T^r  X  1  X  .234950=  .00006652 
/4,17o 

•i.A  ?-0  XlX.  228107=  .00000923 
/4,173 


Present  value=$17.00925376. 

If,  therefore,  $17.0093  is  the  present  value  of  a  life  annuity 
due  of  $1.00,  it  is  possible  for  an  annual  premium  of  $1.00 
paid  continuously  throughout  life  to  purchase  any  whole-life 
policy  the  present  value,  or  net  single  premium  of  which  is 
$17.0093;  and  the  net  annual  level  premium  necessary  to 
purchase  a  life  policy  for  $1,000  will  be  found,  according  to 
our  formula,  by  dividing  this  sum  into  $504.59,  the  net  sin- 
gle premium,  as  shown  herewith  : 

7  net  annual  level  premium. 


The  net  annual  level  premium  for  an  ordinary  life  policy  of 
$1,000  issued  at  age  45,  American  Experience,  3  per  cent. 
basis,  is  therefore  $29.67. 

3.  Limited-payment  life  policy.  —  If  it  is  desired  to 
pay  for  the  above  whole-life  policy  in  twenty  annual  payments 
instead  of  allowing  them  to  continue  throughout  life,  it  is  re- 
quired to  compute  the  annual  premium,  which,  continued  for 
twenty  years,  or  ceasing  upon  prior  death,  will  purchase  this 


THE  NET  LEVEL  PREMIUM  183 

policy.  In  accordance  with  our  formula  the  annual  premium 
in  this  case  will  be  found  by  dividing  into  the  net  single  pre- 
mium the  present  value  of  a  temporary  life  annuity  due  for 
a  term  of  twenty  years  following  age  45.  If  from  the  life 
annuity  due  computed  on  page  180  heretofore,  the  sum  of  the 
first  twenty  terms  be  taken,  this  amount  will  equal  the  present 
value  of  a  twenty-year  term  annuity  due.  This  is  found  to 
be  $13.5095.  The  net  annual  premium  therefore  for  a 
twenty-payment  life  policy  at  age  45  is  ^.-o^V  or  $37.3"5. 

4.  Deferred  annuity.  —  Deferred  annuities  a.re  ordi- 
narily paid  for  by  means  of  annual  rather  than  single  pre- 
miums, and  the  premium  may  continue  through  the  entire 
period  of  deferment  or,  as  in  the  case  of  the  whole-life  policy 
above,  may  be  limited  to  a  stated  number  of  years.  As  with 
premiums  on  insurances,  the  annual  premium  on  these  con- 
tracts is  paid  only  during  survival.  If,  therefore,  the  deferred 
annuity  issued  at  age  40  begins  the  payment  of  an  annual 
income  of  $100  at  age  70  if  living,  and  if  the  net  single  pre- 
minum  for  it  is  $155.947  x  as  determined  on  page  170,  the 
continuous  annual  premium  on  this  policy  may  be  paid  until 
one  year  prior  to  the  beginning  of  the  annuity,  or  until  the 
holder  of  the  contract  is  aged  69.  In  this  case  the  annual 
premium  becomes  a  temporary  annuity  due  for  a  term  of 
thirty  years,  ages  40  to  69  inclusive.  The  amount  of  this  net 
annual  premium  will  be  found  therefore  by  dividing  the  net 
.single  premium  by  the  present  value  of  an  annuity  due  of 
!$1.00  computed  for  the  term  stated.  This  annuity  value  is 
computed  as  follows: 

$1.00  due  immediately  ==$1.000000 

H4S-  X  1  X  .970874=     .96136489 
78,106 


X  l  X  -942596=  .92402309 


7o,10o 

f7K   7<2O 

•-'(*  X  I  X  .915142=  .88791246 
7o,luo 


iThe  result  obtained  on  page  172  was  $155.936.  The  difference  of 
approximately  one  cent  is  due  to  the  failure  to  carry  decimals  suf- 
ficiently far  in  the  two  separate  methods  of  ascertaining  this  result. 


184       THE  PRINCIPLES  OF  LIFE  INSURANCE 

74,985 

78,106  X1X. 888487=  .85298438 

78'1Q6XlX. 862609=  .81917263 

73,345 

78  106  xlx-837484=     .78643464 

72,497 

78>106'XlX. 789409=  .72392644 

70,731 

yg-^r  X 1  X  .766417=  .69404963 

69,804 

78)106XlX. 744094=  .66500317 

68,842 

7^-j^r  X 1 X  .722421=  .63673606 

67,841 

78>106XlX. 701380=  .60920186 


.  680951=  .58235582 

H2^!  X  1  X  .661  1  18=  .55615982 

64,563 

T^g-XlX.  641862=  .53056788 

63  364 

^g-^rXlX.  623167=  .50554828 

62,104 

T^YQ-g-XlX.  605016=  .48106309 

.  587395=  .45708756 


78;10gXlX.  570286=  .43359581 

78^06  X  l  X  -553676:==  -41056068 

56,371 

—rrrXlX.  537549=  .38796219 

i  0,1  uo 

.  521893=  .36578481 


53,030 

yg-^Q-g-  X  1  X  .506692=     .34401809 

51,230 

7g-IY^-XlX.491934=     .32266124 

49  341 

~     X  1  X  .477606=     .30171251 


THE  NET  LEVEL  PREMIUM  185 

•f7)?6!x  IX.  463695=     .28116993 
78,106 

X  IX.  450189=     .26104922 


.437077=  .24136996 
78,106 

x  1  X  .424346=     .22215333 


78,106 


Present  value=$17.00033116. 

The  result  obtained  represents  the  present  value  of  an 
annual  premium  of  $1.00  paid  over  the  same  term  as  the  pre- 
miums on  the  deferred  annuity  and  this  figure  divided  into 
the  net  single  premium  for  the  deferred  annuity  will  give  a 
net  annual  level  premium  of  $9.173  -)-,  as  follows: 

155.947  Qiyq     I 

17.0003  *-*f°    V 

The  annual  level  premiums  computed  to  this  point  should 
afford  a  sufficiently  clear  analysis  of  the  subject  of  the  level 
premium.  The  principles  thus  developed  can  be  applied  in 
ascertaining  annual  premiums  on  all  policies  involving  risks 
on  a  single  life.  There  remain  still  to  be  considered  two 
special  instances  of  the  periodic  premium,  or  two  modifications 
of  the  annual  premium,  namely,  premiums  paid  at  intervals 
of  less  than  one  year,  and  premiums  on  policies  which  promise 
in  the  event  of  certain  contingencies  to  return  to  the  pur- 
chaser the  premiums  paid  in  without  interest. 

Premiums  Paid  at  Intervals  of  Less  than  One  Year. — 
By  an  extension  of  the  principles  laid  down  heretofore  in 
computing  single  and  annual  premiums,  it  would  now  be  pos- 
sible to  ascertain  weekly,  monthly,  quarterly,  and  semi-annual 
premiums.  It  would  be  necessary  to  make  the  time  unit  the 
proper  fractional  part  of  a  year  instead1  of  one  year.  The 
difficulty  with  this  method  lies  in  the  fact  that  none  of  the 
mortality  tables  in  existence  are  graded  for  periods  of  less  than 
one  year.  To  illustrate,  it  is  impossible  to  determine  from 
any  of  the  tables  in  use  the  probability  that  a  man  arriving  at 
age  25  will  die  within  one  week,  one  month,  or  six  months. 
We  can  onlv  say  that  the  chance  that  he  will  die  within  one 


186        THE  PEINCIPLES  OF  LIFE  INSUKANCE 

year  equals  g-J-Jfj.  Because  of  this  fact  the  true  weekly, 
monthly,  or  quarterly  premium  cannot  be  ascertained,  and 
some  method  of  approximation  to  the  correct  result  must  be 
used.  The  usual  method  is  to  make  a  percentage  addition  to 
the  annual  premium,  more  or  less  arbitrary  in  amount,  and 
then  divide  this  result  into  the  requisite  number  of  parts. 
By  this-  plan  the  premium  is  looked  upon  as  an  annual  pre- 
mium paid  in  installments.  That  is,  at  the  beginning  of  any 
policy  year  the  entire  premium  for  the  policy  is  considered  to 
be  due  and  payable,  but  the  insured  is  given  the  privilege  of 
paying  it  in  installments;  then  if  the  contract  should  mature 
by  death  before  the  total  installments  for  the  year  are  paid, 
those  remaining  still  due  will  be  deducted  from  the  matured 
value  of  the  policy  and  the  balance  only  will  be  paid  to  the 
policyholder.  Thus,  a  policy  for  $1,000,  being  paid  for  by 
quarterly  premiums  of  $10.00,  might  mature  by  death  shortly 
after  the  payment  of  the  first  $10.00  installment  of  the  year's 
premium.  The  beneficiary  under  the  policy  would,  therefore, 
be  required  to  pay  the  three  remaining  installments  of  $10.00 
each  before  receiving  the  proceeds  of  the  policy,  or  this 
would  be  equivalent  to  the  settlement  of  the  claim  in  force  by 
the  payment  to  the  beneficiary  of  $970.00. 

The  percentage  added  to  the  annual  premium  to  obtain  the 
semi-annual  premium  varies  with  different  companies.  Some 
add  2  per  cent.,  some  2~y2  per  cent.,  3  per  cent,  or  even  4  per 
cent.  Thus  one  company  quotes  a  gross  annual 2  premium  on 
an  ordinary  life  policy,  age  45,  of  $37.08.  Adding  2  per 
cent,  of  this  amount,  or  $.74,  gives  $37.82,  and  this  result 
divided  by  two  equals  $18.91,  the  semi-annual  premium  quoted 
in  this  company's  rate  book.  Another  company  quotes  an 
annual  premium  of  $37.57  for  the  same  policy  and  a  semi- 
annual premium  of  $19.54.  This  latter  figure  is  obtained  by 

2  It  will  be  noted  that  the  premiums  here  quoted  are  gross  or 
office  premiums.  The  methods  of  loading  for  expenses  to  obtain  the 
gross  premium  are  taken  up  in  Chapter  xvii,  but  these  methods  in 
no  way  affect  the  problem  here  discussed  and  therefore  a  knowledge 
of  them  is  not  necessary  to  an  analysis  of  the  principle  here  involved. 


THE  NET  LEVEL  PREMIUM  187 

adding  4  per  cent,  and  dividing  by  two.  The  same  method  is 
used  likewise  on  twenty-payment  life  policies.  At  age  45, 
the  annual  premiums  of  the  two  companies  referred  to  are 
respectively  $45.73  and  $45.30.  If  2  per  cent,  be  added  to 
the  first  and  4  per  cent,  to  the  latter  and  these  results  be 
divided  by  two,  the  amounts  obtained  for  the  semi-annual  pre- 
mium will  be  respectively  $23.32  and  $23.56.  These  are  the 
quotations  found  in  the  rate  books. 

The  same  method  is  used  in  computing  quarterly,  bi- 
monthly, or  monthly  rates,  of  course  varying  the  percentage 
added  in  each  case.  The  rate  books  do  not  ordinarily  quote 
bi-monthly  or  monthly  rates.  From  4  to  6  per  cent,  is  usually 
added  to  the  annual  premium  and  this  result  divided  by  four 
to  obtain  the  quarterly  premium.  Thus  to  the  annual  rate 
of  $37.08  quoted  above  for  an  ordinary  life  policy  is  added  4 
per  cent,  or  $1.48,  making  a  total  of  $38.56  and  this  sum 
divided  by  four  gives  $9.64,  the  quoted  rate  for  quarterly 
payments. 

The  increase  in  the  rate  on  premiums  paid  more  frequently 
than  annually  is  justified  on  three  grounds:  (1)  the  greater 
expense  of  collection,  where  collection  must  be  made  two,  four, 
or  more  times  yearly  instead  of  only  once;  (2)  the  loss  of 
interest,  due  to  the  assumption  made  in  computing  annual 
premiums  that  the  premium  is  paid  in  at  the  beginning  of  the 
year  and  draws  interest  until  paid  out  at  the  end  of  the  year. 
On  the  basis  of  a  3  per  cent,  interest  assumption  in  computing 
premiums  the  interest  lost  in  case  of  semi-annual  premiums 
will  be  3  per  cent,  on  one-half  of  the  annual  premium  for  a 
period  of  six  months.  (3)  Some  of  the  companies  justify 
this  increased  rate  because  of  the  greater  tendency  to  lapse 
policies  where  premiums  are  paid  twice  or  four  times  yearly 
instead  of  only  once.  The  temptation  to  lapse  comes  twice  or 
four  times  a  year  likewise,  and  thus  results  in  a  greater  lapse 
ratio  among  these  policyholders  than  in  the  case  of  those 
who  pay  annually. 

Return- Premium  Policies. —  Policies  sometimes  will  in- 
clude a  provision  whereby  on  the  occurrence  of  certain  speci- 


188       THE  PRINCIPLES  OF  LIFE  INSUKANCE 

fied  contingencies  the  premiums  paid  in  will  be  returned  to 
the  payer.  This  privilege  is  usually  added  to  policies  to 
balance  some  objectionable  feature  in  the  contract  that  mili- 
tates against  its  ready  sale.  For  instance,  much  objection  is 
found  to  the  pure-endowment  policy  because  of  the  possibility 
of  losing  one's  entire  investment  in  case  of  death  before  the 
maturity  of  the  endowment.  By  means  of  this  new  feature 
the  company  can  say:  "We  will  give  you  your  endowment 
in  case  you  outlive  the  period  and  if  you  are  willing  to  pay  a 
slightly  larger  premium  we  can  promise  that  in  case  of  your 
death  before  the  endowment  period  is  completed,  all  the  pre- 
miums paid  in  will  be  returned  to  your  estate  or  to  any  speci- 
fied beneficiary."  These  policies  sometimes  promise  the  re- 
turn of  the  exact  premium  paid  and  sometimes  a  specified 
amount  slightly  less  than  the  premium.  For  instance,  if  a 
certain  pure  endowment  costs  $50  per  year,  the  company 
might  promise  a  return  of  $40  for  every  premium  paid  to 
date  of  death.  Suppose  now  a  company  issues  a  ten-year  pure 
endowment  for  $1,000  to  a  person  aged  45.  It  was  found  on 
page  158  that  the  net  single  premium  for  this  policy  is 
$647.69.  The  net  annual  premium  for  the  same  policy  will 
be  found  by  dividing  the  above  sum  by  the  present  value  of  a 
temporary  life  annuity  due  of  $1.00  limited  to  a  term  of  ten 
years,  beginning  at  age  45,  and  this  latter  value  can  be  found 
by  adding  the  first  ten  terms  of  the  whole-life  annuity  due  as 
computed  on  page  180.  This  value  is  $8.33492701.  If, 
therefore,  the  following  computation  is  made,  neglecting  un- 
important decimals, 

647.69  —  77  71 

8.3349  <J-> 

it  is  found  that  the  net  annual  level  premium  for  the  ten- 
year  pure  endowment  is  $77.71.  Suppose  furthermore  that 
the  company  promises  in  event  of  the  death  of  the  policy- 
holder  before  the  ten-year  period  has  elapsed  to  return  to  his 
estate  $70  for  every  premium  paid.  It  is  desired  to  find  the 
extra  premium  that  must  be  paid  to  obtain  this  benefit.  The 
benefit  consists  in  the  return  of  a  single  $70  if  the  insured 
should  die  during  the  first  year  after  the  contract  is  issued;  if 


THE  NET  LEVEL  PREMIUM  189 

he  should  die  during  the  second  year  he  gets  twice  $70 ;  in  the 
third  year  three  times  $70  and  so  on,  his  death  between  the 
payment  of  his  tenth  premium  and  the  time  when  the  endow- 
ment would  have  matured  entitling  his  estate  to  a  return  of  ten 
times  $70  or  $700.  The  chances  that  any  of  these  payments 
will  be  made  therefore  consist  in  the  separate  chances  or 
probabilities  that  he  will  die  the  first  year,  the  second  year  or 
the  tenth  year.  It  is  equivalent  to  the  addition  to  the  pure 
endowment  of  an  increasing  insurance  of  $70,  i.e.  an  insurance 
of  $70  the  first  year,  $140  the  second  year,  etc.  The  method 
of  computing  the  cost  of  this  increasing  insurance  is,  there- 
fore, as  follows:  The  net  single  premium  for  an  increasing 
insurance  of  $70,  American  Experience  3  per  cent.,  age  45 : 

QOQ 

•X   1X70X.970874=$  .7586569 


74,173 

Q    A    C\ 

74173X  2x70x.942596=  1.5087026 

870 

74173X  3X70X.915142=  2.2541416 

QQ/» 

74173X  4  X  70  X.  888487=  3.0051854 

927 

•?4173X  5  X  70  X.  862609=  3.7732529 

962 

74173X  6  X  70  X.  837484=  4.5619974 

°       X  7X7°X-813092=  5.3768015 


1  944 
74  173  X   8  X  70  X.  789409=  6.2222113 

vYm  X   9X  70  X.  766417=  7.1020640 

1  143 

X  10  X70X.  744094=  8.0265003 


$42.5895139 


The  net  single  premium  for  the  return-premium  feature, 
namely,  $42.59,  will  be  divided  by  $8.3349  to  ascertain  the  net 
annual  level  premium,  as  follows: 


2  •« »  =$5.1097 


8.8349 

This  result,  $5.11,  is  therefore  the  amount  to  be  added  to 


190        THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  net  annual  level  premium  for  the  pure  endowment,  or 
$77.71,  giving  $82.82  as  the  net  premium  for  the  pure  en- 
dowment with  the  return  premium  feature  included. 

It  would  be  possible  now  to  compute  the  net  annual  pre- 
mium which  would  return  the  total  or  gross  premium  paid  by 
the  insured  instead  of  some  arbitrary  sum,  as  was  used  above, 
but  this  would  involve  processes  more  complicated  than  it 
is  desired  here  to  discuss.  The  principles  here  developed 
are  applicable  to  any  kind  of  policy,  but  the  return-premium 
feature  is  ordinarily  added  to  policies  only  in  cases  where  it 
may  be  balanced  against  some  seemingly  objectionable  charac- 
teristic whereby  the  insured  apparently  loses.  Thus  any 
policy  containing  the  pure-endowment  provision  and  not  hav- 
ing a  corresponding  insurance  element  offers  a  good  oppor- 
tunity for  the  return-premium  privilege.  Policies  involving 
survivorship  likewise  make  use  of  it.  Cases  in  point  are  the 
deferred  annuity  and  the  reversionary  annuity. 

BIBLIOGRAPHY 

PAWSON,  MILES  M.,  Elements  of  Life  Insurance,  ed.  3,  38-75, 
84r-92. 

FACKLER,  EDWARD  B.,  Notes  on  Life  Insurance,  chaps.  3,  6,  7, 
9,  10,  11.  (An  excellent  elementary  discussion  of  formulae 
and  commutation  columns.) 

Mom,  HEXRY,  Life  Assurance  Primer,  chaps.  7,  8,  10. 
(A  brief  explanation  of  commutation  columns.) 

WILLEY,  NATHAN,  Principles  and  Practice  of  Life  Insurance,  re-- 
vised by  Henry  Moir,  ed.  7,  36-59. 

(An  excellent  statement  in  brief  mathematical  form  of 
interest,  life  contingencies,  commutation  columns,  net  val- 
ues, and  costs  of  insurance.) 


CHAPTER  XVI 


THE  RESERVE 

By 
BRUCE  D.  MUDGETT 

One  of  the  most  difficult  subjects  for  the  layman  to  under- 
stand in  connection  with  the  administration  of  a  life-insurance 
company  is  the  existence  of  the  enormous  assets  possessed  by 
the  different  companies  and  the  reasons  why  these  funds  must 
be  held.  That  a  single  company  should  hold  over  half  a  bil- 
lion dollars  strikes  many  persons  as  unnecessary  and  as  an 
opening  to  the  possible  misuse  of  such  funds.  The  fact  is  not 
generally  known,  or  clearly  understood,  that  a  major  portion 
of  these  assets  represents  liabilities  held  by  the  company  for  its 
policyholders  and  subject  to  call  by  them  at  any  time  upon  the 
surrender  of  their  policies.  This  portion  of  the  funds  is 
held  in  trust  by  the  company  and  is  known  as  the  reserve. 

Financial  Importance  of  the  Reserve. —  The  Insurance, 
Year  Book  for  1914  shows  that  thirty-four  companies  doing 
business  in  New  York  State  in  1913  held  on  December  31 
of  that  year  total  admitted  assets  amounting  to  $4,351,042,584 
and  of  this  sum  $3,677,450,917,  or  over  84  per  cent.,  was  held 
as  reserve.  A  comparison  of  the  total  admitted  assets  and 
the  reserves  of  the  five  largest  life-insurance  companies  in  the 
United  States  is  also  furnished  in  the  following  table : 


COMPANY 

ADMITTED 
ASSETS 
DEC.  31,  1913 

RESERVES 
(  ORDINARY 
BUSINESS) 
DEC.  31,  1913 

PER  CENT. 
OF  RESERVE 
TO  AD- 
MITTED 
ASSETS 

New  York  Life    

$748,497,740 

$625,747,810 

84 

Mutual  Life   

607,057,045 

493,043,566 

81 

Equitable  of  New  York. 
Metropolitan    Life    .... 
Northwestern  Mutual  .  . 

525,345,619 
447,829,229 
310,556,962 

429,689,154 
396,744,033 
282,173,211 

82 
89 
91 

191 


192       THE  PRINCIPLES  OF  LIFE  INSURANCE 

These  figures  likewise  show  that  80  to  90  per  cent,  of  the 
total  funds  held  by  these  companies  is  included  in  the  reserve. 
The  possession  of  these  vast  resources  justifies  a  careful  analy- 
sis of  the  sources  and  purposes  of  the  reserve. 

The  Origin  of  the  Reserve. —  The  life-insurance  reserve 
arises  as  a  result  of  the  method  of  paying  premiums.  In  the 
three  chapters  immediately  preceding,  an  analysis  of  net  or 
mortality  premiums  has  been  undertaken  and  the  statement 
is  there  made  that  life-insurance  policies  may  be  purchased  by 
a  single  cash  payment  or  by  annual  premiums  paid  during 
life.  The  fact  was  demonstrated  furthermore  that  mortality 
rates  increase  with  increasing  age  and  that  the  annual  cost  of 
insurance  therefore  augments  rapidly  with  advancing  age. 
This  results  in  the  creation  of  a  surplus  from  the  annual  level 
premiums  paid  in  the  early  policy  years  when  mortality  costs 
are  low,  and  this  surplus  is  available  in  the  later  years  of  high 
mortality  when  premiums  are  inadequate.  The  purpose  of 
this  fund  is  to  average  the  varying  yearly  costs  so  that  the 
burden  of  insurance  premiums  can  be  carried  at  all  times. 
These  level  premiums  thus  bring  into  the  possession  of  the 
company,  funds  which  are  not  used  immediately  to  pay  policy 
claims  but  which  must  be  accounted  for  by  the  company  and 
placed  to  the  credit  of  the  policyholder  until  needed  at  some 
future  date.  In  like  manner  when  a  policy  is  purchased  by  a 
single  premium  this  premium  becomes  the  total  contribution 
of  the  insured  toward  claims  paid  under  contracts  of  this  class, 
and  in  the  early  years  of  the  policy  contract  a  large  share  of 
this  single  premium  must  still  be  in  the  possession  of  the  com- 
pany. 

Definition  and  Purpose  of  the  Reserve. — In  Chapters 
XIII  to  XV,  premium  rates  were  computed  on  the  assump- 
tions that  a  specified  rate  of  interest  would  be  earned  on  funds 
in  the  possession  of  the  company  and  that  the  mortality  ex- 
perienced among  policyholders  would  be  at  the  rate  shown  in 
the  American  Experience  table.  If  these  assumptions  are 
realized  in  practice  the  premiums  will  be  adequate.  From  the 
standpoint  of  premiums  there  are  two  ways  of  viewing  the  re- 


THE  RESEEVE  193 

serve.  It  may  be  considered  as  the  difference  between  the  pre- 
miums collected  in  the  past  and  the  policy  claims  paid  —  that 
is,  the  surplus  premiums  on  hand  at  any  given  time ;  or  it  may 
be  looked  upon  as  that  fund  which  together  with  future  pre- 
miums to  be  collected,  if  any,  will  enable  the  company  to  pay 
future  estimated  claims.  The  former  is  called  the  unearned 
premium  reserve,  or  the  reserve  is  said  to  be  valued  retrospec- 
tively, that  is,  looking  backward  to  past  accumulations;  the 
latter  is  the  reinsurance  reserve,  or  the  reserve  is  valued  pros- 
pectively  —  looking  forward  to  future  requirements.  The 
word  "  reserve,"  however,  has  come  to  have  a  technical  mean- 
ing in  life  insurance,  due  to  the  fact  that  most  of  the  states 
have  passed  laws  requiring  some  definite  method  of  valuing 
this  fund,  and  when  the  term  is  now  used  this  technical  or 
legal  reserve  is  ordinarily  meant. 

The  legal  reserve  required  by  state  laws  to  be  held  is  in- 
variably the  prospective  reserve,  or  the  fund  which  with  future 
premiums,  if  any,  based  on  assumed  rates  of  interest  and 
mortality  will  pay  estimated  future  claims.  If  the  actual 
experience  of  a  company  as  regards  interest  and  mortality 
exactly  coincides  with  the  expected  or  assumed  experience  the 
reserve  fund  will  always  be  the  same  whether  valued  as  un- 
earned premium  or  as  a  reinsurance  fund,  but  such  coinci- 
dences do  not  occur  in  practice.  If  premiums  are  redundant 
the  unearned  premiums  will  be  greater  than  the  legal  reserve ; 
if  they  are  inadequate  the  surplus  left  from  them  after  pay- 
ment of  claims  accrued  will  be  less  than  the  legal  requirement. 

That  the  legal  reserve  shall  be  determined  on  the  basis  of 
future  requirements  is  necessary  because  of  the  fact  that  the 
life-insurance  contract  is  written  for  a  long  term  and  cannot 
be  cancelled  by  the  company  and  the  premium  rates  can  never 
be  changed.  Therefore,  the  assumptions  as  to  future  interest 
earnings  and  mortality  must  be  made  on  a  safe  basis,  and  the 
reserve  must  be  valued  with  one  object  in  mind,  viz,  the 
continued  solvency  of  the  company.  The  state,  in  establish- 
ing a  method  of  valuing  life-insurance  contracts,  sets  certain 
standards  of  interest  and  mortality  that  can  safely  be  realized 


194        THE  PRINCIPLES  OF  LIFE  INSURANCE 

and  then  says,  in  effect,  that  any  company  is  solvent  if  on  the 
basis  of  estimates  made  with  these  standards  its  future  pre- 
miums plus  its  reserve  fund  will  enable  it  to  pay  all  claims. 
The  standards  set  by  state  law  in  most  instances  are  a  3y2  per 
cent,  interest  rate  and  mortality  according  to  the  American 
Experience  table.  This  fixes  the  minimum  reserve  required, 
but  a  company  may  usually  value  its  liabilities  by  a  higher 
standard  if  it  so  chooses.  Many  companies  to-day  value  their 
reserves  on  new  policies  on  a  3  per  cent,  interest  basis  and  thus 
hold  a  larger  reserve  than  required  by  law.  The  solvency  of  a- 
company  is  thus  guaranteed  if  the  assumptions  made  are 
adequate,  and  years  of  experience  with  insurance  under  Ameri- 
can conditions  have  shown  that  they  are. 

Method  of  Calculating  the  Reserve. —  Inasmuch  as  the 
legal  reserve  looks  to  future  requirements,  and  is  based  on 
the  assumption  that  a  certain  interest  rate  will  be  earned  and 
must  provide  for  mortality  equal  to  that  of  the  American 
Experience  table,  these  factors  must  form  the  basis  for  calcu- 
lating reserves  on  any  policy.  Likewise  since  insurance  may 
be  purchased  by  a  single  or  by  an  annual  level  premium,  re- 
serves will  differ  according  to  the  method  of  paying  premiums, 
for  in  the  latter  case  credit  may  be  taken  for  premiums  still 
due.  Suppose  therefore  it  is  desired  to  calculate  the  reserves 
on  a  whole-life  policy  for  $1,000  issued  at  age  45,  based  on 
the  American  Experience  table  and  3  per  cent,  interest  and 
paid  for  by  a  single  premium.  The  net  single  premium  for 
this  policy  was  found  in  Chapter  XIII  to  be  $504.58493. 
The  simplest  method  of  showing  the  operation  of  the  reserve 
on  this  policy  will  be  to  make  the  assumption  that  a  company 
insures  a  group  of  74,173  persons,  the  number  living  at  age 
45  according  to  the  mortality  table,  and  trace  the  disposition 
of  the  entire  fund  contributed  by  them,  showing  how  the  total 
fund  paid  at  the  start  is  increased  year  by  year  through  inter- 
est accretions  and  decreased  at  the  same  time  by  payment  of 
death  losses  occurring  within  the  group. 

According  to  the  table,  therefore,  74,173  persons  will  in- 
sure at  age  45  and  each  will  pay  to  the  company  $504.58493,. 


THE  RESEKVE  195 

giving  the  company  a  fund  of  $37,426,578.013  at  the  begin- 
ning of  the  first  year  of  insurance.  This  sum  is  paid  at  the 
beginning  of  the  year  and,  since  death  claims  are  assumed  to 
be  paid  at  the  end  of  the  year,  will  earn  interest  for  one  year 
before  any  claims  for  death  payments  will  be  made  upon  it. 
Three  per  cent,  of  the  above  sum  is  $1,122,797.340  and  this 
added  to  the  original  sum  gives  a  fund  of  $38,549,375.343  at 
the  close  of  the  year.  Death  claims  for  $828,000  are  now 
due  and  when  paid  leave  a  net  surplus  of  $37,721,375.34. 
'  This  latter  sum  represents  the  funds  belonging  to  policy  holders 
still  living  from  among  the  original  group,  or  73,345,  and  if 
the  insurance  were  cancelled  at  this  time  and  the  share  of  each 
returned  to  him  there  would  be  available  $514.30  for  each 
policyholder.  In  continuing  the  insurance,  however,  this 
$37,721,375.343  again  earns  interest  and  the  process  here 
described  is  repeated  for  the  second  year.  The  accompanying 
table,  showing  the  net  reserves  on  a  single  premium  policy  at 
age  45,  traces  the  operation  of  the  fund  for  the  group  until  at 
age  96  they  will  all  have  died  according  to  the  mortality  table, 
and  in  the  last  column  shows  the  reserve  standing  to  the  credit 
of  the  individual  policyholder  for  each  of  the  fifty-one  years 
of  insurance.  The  table  shows  the  total  sum  on  hand  at  the 
beginning  of  each  year  of  insurance,  the  amount  of  interest 
earned  during  the  year,  the  total  of  these  two  amounts,  the 
death  claims  paid  during  the  year  and  the  reserve  fund  re- 
maining at  the  close  of  the  year  for  the  group  as  a  whole  and 
the  pro-rata  share  belonging  to  each  survivor.  Since  this 
policy  is  paid  for  by  a  single  premium,  this  individual  reserve 
constitutes  the  total  sum  available  per  policyholder  for  the 
payment  of  future  claims  and  therefore  must  equal  the  net 
single  premium  at  each  age  later  than  forty-five  for  a  whole- 
life  policy  at  that  age.  If  these  figures  are  correct  the  ter- 
minal reserve  at  age  94  (i.e.  the  reserve  at  the  end  of  the  year) 
will  be  the  net  single  premium  at  age  95  and  this  sum  in- 
creased at  3  per  cent,  interest  for  one  year  will  just  equal  the 
amount  payable  at  the  close  of  age  95,  for  the  mortality  table 
shows  that  the  last  person  of  the  group  insured  will  certainly 


196       THE  PRINCIPLES  OF  LIFE  INSURANCE 


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THE  RESERVE 


197 


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14 

M 


198        THE  PRINCIPLES  OE  LIFE  INSURANCE 

have  died  by  this  time.  The  fact  that  the  fund  payable  for 
.the  last  three  deaths  equals  $3,015.61  (see  column  6)  or  a  sur- 
•plus  of  $15.61  above  the  amount  of  the  claims  accruing  is  due 
,to  failure  to  carry  results  to  a  sufficient  number  of  decimal 
places  in  the  computations  for  earlier  years.  The  true  ter- 
minal reserve  at  age  94  is  $970.87  instead  of  $975.92  as  shown 
in  the  table.  This  slight  inaccuracy  in  no  way  affects  the 
principle  involved  and  does  not  appear  in  the  figures  for  the 
Individual  reserve  until  age  87,  in  which  instance  a  dis- 
crepancy of  one  cent  is  found. 

This  table  shows  that  the  reserve  at  the  close  of  each  year 
of  insurance  is  adequate  for  the  payment  of  all  future  claims 
against  such  a  policy  if  the  assumptions  as  to  mortality  and 
interest  are  realized.  The  company,  therefore,  which  holds 
this  reserve  against  a  single-premium  whole-life  policy  issued 
at  age  45  is  solvent.  It  is  not  necessary,  of  course,  to  insure 
74,173  persons  under  this  identical  policy  to  guarantee  the 
adequacy  of  this  reserve.  But  if  a  sufficient  number  of  per- 
sons are  insured  under  all  policies  and  at  all  different  ages 
to  insure  the  operation  of  the  law  of  average,  the  reserves  so 
determined  will  be  adequate  for  any  policy. 

The  above  policy  may  be  issued  as  an  ordinary  life  policy, 
payable  by  annual  level  premiums  of  $29.665318.  The  table 
on  page  200  shows  the  operation  of  the  reserve  under  this  policy 
in  a  manner  similar  to  the  case  where  the  premium  was  paid 
in  a  single  sum.  The  assumption  is  made,  viz,  that  a 
group  of  74,173  persons  is  insured  at  the  moment  they  enter 
upon  their  forty-fifth  year  of  age.  The  main  difference  be- 
tween the  two  tables  arises  from  the  methods  of  paying  premi- 
ums. Whereas  the  entire  contributions  of  the  policyholders 
are  paid  at  the  beginning  in  the  first  case,  in  the  latter  instance 
the  first  annual  installment  only  is  paid  and  the  company 
therefore  does  not  hold  so  large  a  fund.  Tracing  the  method 
of  the  second  table  more  in  detail,  it  shows  the  total  premiums 
paid  in  at  the  start,  interest  earned  during  the  year,  the  total 
sum  on  hand  at  the  end  of  the  year,  before  deducting  death 
claims,  and  after  the  latter  have  been  paid,  and  finally  the  in- 


THE  KESERVE  190 

dividual  reserve  or  proportionate  share  of  each  survivor  in  the 
total  reserve  fund  at  the  end  of  the  year.  In  the  second  year 
the  fund  on  hand,  namely  the  total  reserve  fund  at  the  close  of 
the  previous  year,  is  increased  by  the  premiums  paid  at  the  be- 
ginning of  the  second  year.  This  fund  is  then  increased  by 
interest  accruing  during  the  year  and  reduced  by  death  pay- 
ments at  the  end  of  the  year  in  the  same  manner  as  in  the 
previous  instance.  This  process  is  repeated  for  each  year  of 
insurance  until  according  to  the  mortality  table  all  will  have 
died,  and  in  the  last  year,  with  three  persons  to  pay  premiums, 
their  payments  plus  the  total  reserve  fund  on  hand  from  the 
previous  year  increased  during  the  year  by  interest  should  at 
the  close  of  age  95  just  equal  $3,000.  Again  the  figures  in 
the  table  miss  the  correct  figure  by  a  small  amount,  $19.73, 
due  to  the  failure  to  carry  the  results  to  a  sufficient  number  of 
decimal  places. 

Disregarding  the  slight  inaccuracy  as  explained,  the  table 
shows  the  adequacy  of  the  net  annual  premiums  to  pay  death 
losses  according  to  the  American  Experience  table,  providing 
the  surplus  from  early  premiums  is  preserved  until  needed  in 
the  later  years.  This  surplus  is  represented  by  the  figures  in 
column  12  of  the  second  table  and  is  called  the  reserve. 

A  comparison  of  the  individual  reserves  for  single-premium 
and  for  annual-premium  policies  will  show  a  great  difference 
between  them.  For  instance,  at  the  close  of  the  fifth  insurance 
year  in  the  illustrations  used,  when  the  insured  will  have 
reached  age  50,  the  single-premium  reserve  is  $555.22  while 
the  annual  premium  reserve  is  but  $102.20,  a  difference  of 
$453.02.  Likewise  after  thirty  years  the  two  reserves  are 
respectively  $824.93  and  $646.62,  differing  by  $178.31.  A 
simple  test  of  the  accuracy  of  the  annual-premium  reserve  is 
possible  from  these  figures.  It  was  found  on  page  198  that  a 
company  is  solvent  and  can  pay  future  claims  if  it  holds  the 
single-premium  reserve.  The  annual-premium  reserve  there- 
fore being  much  smaller  does  not  in  itself  assure  solvency. 
But  in  the  latter  case  the  company  will  receive  regular  yearly 
premiums  in  the  future  and  it  is  proper  to  take  credit  for  these 


200       THE  PRINCIPLES  OF  LIFE  INSURANCE 


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THE  KESEKVE 


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202        THE  PRINCIPLES  OF  LIFE  INSURANCE 

premiums  in  ascertaining  its  solvency.  If,  therefore,  the 
annual  premium  reserve  is  $453.02  short  of  the  amount  neces- 
sary at  the  close  of  the  fifth  year  of  insurance  to  guarantee 
solvency,  this  figure  must  represent  the  present  value  of  future: 
premiums  to  be  collected  if  $102.20  is  the  correct  reserve.. 
By  the  method  of  computing  the  present  value  of  a  life 
annuity  due  of  $1.00  as  shown  on  page  180  such  values  can 
be  computed  for  any  age  such  as  50,  55.  60,  etc.  The  present 
value  of  a  one-dollar  annuity  due  at  age  50,  so  determined,  is 
$15.2710.  If  the  net  annual  premium  on  the  ordinary  life 
policy  at  age  45  is  $29.665  then  the  present  value  of  future 
premiums  receivable  on  this  policy  after  age  50,  or  of  an 
annuity  due  of  $29.665,  is  $29.665  X  15.2710  or  $453.02, 
This  is  the  exact  amount  by  which  the  annual-premium  re- 
serve fell  short  of  the  single-premium  reserve  and  $102.20 
is  therefore  correct.  This  justifies  the  definition  of  the  legal 
reserve  previously  given,  as  that  sum  of  money  which  with 
future  premiums,  if  any,  will  enable  the  company  to  pay 
future  claims. 

The  following  table  has  been  arranged  to  make  comparisons 
similar  to  the  one  described  above  for  different  years  during 
the  term  of  the  ordinary  life  policy  issued  at  age  45  and  shows 
the  difference  between  the  single-  and  the  annual-premium 
reserves  for  every  fifth  year  until  age  80  as  well  as  the  present 
value  at  each  selected  age  of  the  future  net  annual  premiums 
still  to  be  collected  on  the  policy  issued  at  age  45.  Compari- 
son of  columns  4  and  7  will  show  that  the  present  value  of 
future  premiums  in  each  instance  just  equals  the  difference 
between  the  two  specified  reserves. 


THE  KESERVE 


203 


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204       THE  PRINCIPLES  OF  LIFE  INSURANCE 


Comparison  of  Reserves  on  Different  Interest  Bases  and 
on  Different  Policies. —  Instructive  comparisons  may  be 
made  of  reserves  computed  on  different  interest  bases  to  show 
the  importance  of  the  interest  rate  used  and  its  effect  on  the 
size  of  the  reserve. 

TABLE  IV 
COMPARISON  OF  TERMINAL  RESERVES  ON  ORDINARY  LIFE  POLICIES, 

$1,000, 
American  Experience,  Age:  ^5.       At  Different  Interest  Rates. 


YEAR  OF 
INSURANCE 

3  PER 
CENT. 

3y2  PER 
CENT. 

4  PER 
CENT. 

4y2  PER 
CENT. 

1 

19.61 

18.38 

17.24 

16.17 

2 

39.65 

37.23 

34.98 

32.87 

3 

60.12 

56.55 

53.22 

50.11 

4 

80.98 

76.32 

71.95 

67.86 

5 

102.20 

96.48 

91.12 

86.09 

6 

123.74 

117.03 

110.72 

104.78 

7 

145.59 

137.93 

130.71 

123.92 

8 

167.70 

159.16 

151.08 

143.47 

9 

190.06 

180.68 

171.81 

163.41 

10 

212.62 

202.47 

192.85 

183.72 

11 

235.35 

224.50 

214.17 

204.37 

12 

258.22 

246.71 

235.75 

225.32 

13 

281.18 

269.09 

257.55 

246.54 

14 

304.22 

291.60 

279.53 

268.00 

15 

327.27 

314.19 

301.66 

289.65 

16 

350.30 

336.83 

323.88 

311.46 

17 

373.26 

359.46 

346.16 

333.38 

18 

396.12 

382.04 

368.45 

355.37 

19 

418.83 

404.54 

390.72 

377.38 

20 

441.35 

426.90 

412.91 

399.37 

21 

463.62 

449.07 

434.95 

421.28 

22 

485.61 

471.01 

456.82 

443.05 

23 

.  507.25 

492.66 

478.45 

464.63 

24 

528.51 

513.97 

499.78 

485.96 

25 

549.34 

534.89 

520.7-8 

507.00 

26 

569.69 

555.39 

541.38 

527.69 

27 

589.57 

575.44 

561.58 

548.01 

28 

608.98 

595.06 

581.39 

567.97 

29 

627.98 

614.30 

600.85 

587.62 

30 

646.62 

633.22 

620.02 

607.02 

31 

664.95 

651.87 

638.95 

626.22 

32 

683.03 

670.29 

657.70 

645.26 

33 

700.85 

688.50 

676.26 

664.15 

34 

718.41 

706.47 

694.62 

682.88 

35 

735.70 

724.20 

712.77 

701.43 

36 

752.58 

741.55 

730.56 

719.65 

THE  RESERVE 


205 


TABLE  IV.—  Continued 


YEAR  OF 
INSURANCE 

3  PER 

CENT. 

3y2  PER 
CENT. 

4  PER 
CENT. 

4y2  PER 
CENT. 

37 

769.08 

758.54 

748.03 

737.56 

38 

785.29 

775.26 

765.24 

755.25 

39 

801.35 

791.86 

782.37 

772.89 

40 

817.34 

808.42 

799.49 

790.55 

41 

833.10 

824.78 

816.43 

808.07 

42 

848.36 

840.65 

832.91 

825.13 

43. 

862.79 

855.68 

848.53 

841.35 

44 

876.37 

869.85 

863.28 

856.12 

45 

889.45 

883.52 

877.54 

871.51 

46 

902.26 

896.93 

891.55 

886.12 

47 

914.20 

909.45 

904.65 

899.80 

48 

923.93 

919.67 

915.35 

910.99 

49 

933.05 

929.26 

925.41 

921.51 

50 

941.21 

937.84 

934.42 

930.95 

51 

1000.00 

1000.00 

1000.00 

1000.00 

Table  IV  shows  the  reserves  on  an  ordinary  life  policy  for 
$1,000  issued  at  age  45  and  paid  for  by  annual  premiums, 
when  computed  on  four  different  interest  bases,  viz,  3,  3%,  4, 
and  4%  per  cent.  The  table  shows  that  the  lower  interest 
rate  invariably  requires  a  higher  reserve  and  this  is  true  for 
every  year  during  the  life  of  the  policy.  The  difference  for 
instance  between  the  3  per  cent,  and  the  4%  per  cent,  reserve 
is  $28.90  in  the  tenth  year  of  insurance  and  reaches  the  maxi- 
mum figure,  viz,  $42.62,  in  the  twenty- third  year.  After  the 
latter  date  the  larger  interest  earnings  credited  to  the  policy 
gradually  bring  the  two  reserves  nearer  together  and  they 
finally  equal  each  other  at  the  end  of  age  95  when  all  reserves 
on  whatever  interest  basis  determined  equal  the  face  value  of 
the  policy.  The  history  of  the  rate  of  interest  used  by  life- 
insurance  companies  in  the  United  States  for  the  calculation 
of  premiums  and  reserves  is  interesting.  In  the  early  days 
of  life  insurance  a  4  per  cent,  rate  was  commonly  used.  This 
was  later  changed  and  3y2  per  cent,  became  the  standard. 
This  standard  is  required  to-day  by  most  state  laws  for  deter- 
mining minimum  reserve  requirements,  but  a  great  number 
of  companies  have  changed  to  a  3  per  cent,  basis  since  about 
1900.  This  means  that  these  companies  are  carrying  a  larger 


206        THE  PKINCIPLES  OF  LIFtf  INSUKANCE 


reserve  than  required  by  law  but  it  means  also  that  they  are 
operating  on  a  very  safe  basis  and  an  unusual  reduction  in 
their  interest  earnings  must  occur  before  the  failure  of  actual 
interest  earned  to  equal  expected  interest  income  would  render 
such  companies  insolvent. 

TABLE  V 

COMPARISON  OF  TERMINAL  RESERVES  ON  DIFFERENT  POLICIES 
American  Experience  3  Per  Cent.,  $1,000  Insurance.     Age!  45. 


1 

2 

3 

4 

5 

05 

to 

GO 

P  r_i 

«    H           ^  r—  i 

&             H^ 

*J 

ill 

III 

3i  *  * 

iSIll 

MI 

fL         H   M 

1$ 

|8 

Hi 

3*1 

ill 

i§«  1 

gill 
!e££ 

s* 

fc 

fc 

fc 

H 

H 

i 

514.30 

19.61 

27.62 

35.48 

7.08 

2 

524.23 

39.65 

56.00 

72.05 

14.05 

3 

534.37 

60.12 

85.17 

109.78 

20.89 

4 

544.70 

80.98 

115.13 

148.66 

27.51 

5 

555.22 

102.20 

145.86 

188.73 

33.83 

6 

565.89 

123.74 

177.37 

230.02 

39.78 

7 

576.71 

145.59 

209.67 

272.59 

45.25 

8 

587.67 

167.70 

242.78 

316.50 

50.15 

9 

598.74 

190.06 

276.72 

361.81 

54.38 

10 

609.92 

212.62 

311.52 

408.62 

57.78 

11 

621.18 

235.35 

347.21 

457.04 

60.22 

12 

632.51 

258.22 

383.84 

507.19 

61.53 

13 

643.89 

281.18 

421.49 

559.24 

61.51 

14 

655.30 

304.22 

460.22 

613.40 

59.96 

15 

666.72 

327.27 

500.15 

669.88 

56.60 

16 

678.13 

350.30 

541.38 

728.99 

51.13 

17 

689.50 

373.26 

584.08 

791.06 

43.19 

18 

700.83 

396.12 

628.45 

856.55 

32.37 

19 

712.08 

418.83 

674.73 

925.98 

18.18 

20 

723.24 

441.35 

723.24 

1000.00 

00.00 

21 

734.27 

463.62 

734.27 

22 

745.16 

485.61 

745.16 

23 

755.88 

507.25 

755.88 

24 

766.41 

528.51 

766.41 

25 

776.73 

549.34 

776.73 

26 

786.82 

569.69 

786.82 

27 

796.67 

589.57 

796.67 

28 

806.28 

608.98 

806.28 

29 

815.69 

627.98 

815.69 

30 

824.93 

646.62 

824.93 

31 

834.01 

664.95 

834.01 

THE  KESEKVE 


207 


TABLE  V. —  Continued 


1 

2 

3 

4 

5 

05 

02 

• 

YEAB  OP  IN- 
SURANCE 

WHOLE-LIFE 
[SINGLE 
PREMIUM] 

WHOLE-LIFE 
[CONTINUOU 
PREMIUMS] 

WHOLE-LIFE 
[TWENTY 
PREMIUMS] 

TWENTY-YEAR 
ENDOWMENT 
INSURANCE 
[CONTINUOU 
PREMIUMS] 

TWENTY-YEAR 
TERM 
[CONTINUOU 
PREMIUMS] 

32 

842.97 

683.03 

842.97 

33 

851.80 

700.85 

851.80 

34 

860.49 

718.41 

860.49 

35 

869.06 

735.70 

869.06 

36 

877.42 

752.58 

877.42 

37 

885.60 

769.08 

885.60 

38 

893.63 

785.29 

893.63 

39 

901.59 

801.35 

901.59 

40 

909.51 

817.34 

909.51 

41 

917.32 

833.10 

917.32 

42 

924.88 

848.36 

924.88 

43 

932.02 

862.79 

932.02 

44 

938.75 

876.37 

938.75 

45 

945.23 

889.45 

945.23 

46 

951.58 

902.26 

951.58 

47 

957.49 

914.20 

957.49 

48 

962.31 

923.93 

962.31 

49 

966.83 

933.05 

966.83 

50 

970.87 

941.21 

970.87 

51 

1000.00 

1000.00 

1000.00 

Table  V  affords  comparisons  of  the  reserves  on  different 
kinds  of  policies  issued  at  the  same  age.  Single-  and  annual- 
premium  reserves  have  already  been  compared 1  but  no  refer- 
ence has  been  made  to  reserves  on  limited-payment  life,  en- 
dowment or  term  policies.  Column  3  of  the  table  shows  that 
the  reserves  on  a  life  policy  paid  for  by  twenty  annual  pre- 
miums increase  much  more  rapidly  than  in  case  of  premiums 
paid  continuously  throughout  life,  and  in  the  twentieth  year 
of  insurance  the  reserve  on  the  limited-premium  policy  is 
identical  with  the  single-premium  reserve.  This  is  necessary, 
of  course,  since  the  insured  cannot  be  required  to  make  further 
premium  advances  after  this  date,  and  to  guarantee  solvency 

i  Page  203. 


208        THE  PRINCIPLES  OF  LIFE  INSUKANCE 

the  reserve  must,  therefore,  be  of  an  amount  sufficient  in  itself 
to  pay  all  future  claims  accruing  against  the  policy..  The 
reserve  on  the  twenty-year  endowment  insurance  is  largest  of 
all  and  becomes  $1,000  at  the  end  of  the  twenty  years. 

This  shows  how  it  is  possible  under  such  a  policy  to  guar- 
antee to  pay  the  face  value  whether  the  insured  be  living  or 
dead,  for  at  the  expiration  of  the  designated  endowment 
period  an  amount  equal  to  the  face  value  of  the  policy  stands 
to  the  credit  of  the  insured.  The  reserve  on  the  twenty-year 
term  policy  is  at  all  times  small,  and  reaches  its  maximum  at 
the  end  of  the  twelfth  year;  thereafter  it  decreases  until  at 
the  end  of  the  twentieth  year  it  is  entirely  exhausted.  An 
interesting  contrast  is  thus  afforded  between  the  term  and  the 
endowment  policies.  The  latter  guarantees  to  pay  the  face 
value  of  the  policy  at  some  time  and  therefore,  in  case  death 
does  not  occur  before  the  twenty  years  have  elapsed,  accumu- 
lates the  amount  payable.  The  term  policy  on  the  other  hand 
promises  the  face  value  only  in  case  of  death  within  the  twenty- 
year  term  and  at  the  close  of  this  period  the  policy  value  is 
entirely  exhausted  and  nothing  will  be  paid  to  the  policy- 
holder. 

BIBLIOGKAPHY 

FACKLER,  EDWARD  B. :    Notes  on  Life  Insurance,  chap.  4. 

(Probably  the  best  adequate  presentation  of  the  subject 
for  the  beginner.) 


CHAPTER  XVII 

THE  GROSS  PREMIUM  — LOADING 

By 
BBUCE  D.  MUDGETT 

In  Chapter  XV  premiums  were  classified  in  one  case  as 
net  or  gross.  The  net  premium,  or  that  portion  which  cares 
for  policy  claims  was  analyzed  at  length.  The  gross,  or 
office,  premium  includes  the  above  plus  an  amount  called  load- 
ing, the  purpose  of  which  is  to  pay  for  expenses  incurred  in 
writing  and  caring  for  insurance  policies  and  to  provide  a 
margin  for  possible  contingencies.  Chief  among  the  latter 
are  errors  in  the  net  premium,  due  to  failure  to  realize  ex- 
pected mortality  or  interest,  losses  arising  from  forfeitures, 
and  the  creation  of  a  fund  from  which  dividends  may  be  paid. 
The  practice  of  paying  dividends  has  become  so  firmly  estab- 
lished that  the  loadings  on  participating  policies  are  almost 
invariably  made  with  the  further  idea  of  creating  a  surplus 
for  future  dividends. 

The  subject  of  loading  shares  with  that  of  distribution  of 
surplus  the  distinction  of  furnishing  insurance  actuaries  some 
of  the  most  difficult  problems  with  which  they  must  contend. 
This  is  due  to  the  complexity  of  the  expense  item  and  the 
difficulty  of  charging  it  proportionately  against  any  policy- 
holder  in  such  a  way  as  to  obtain  substantial  equity.  With 
the  enormous  size  attained  by  many  of  our  largest  life-insur- 
ance companies,  with  the  various  activities  carried  on  by  them, 
with  agency  organizations  covering  the  entire  United  States 
and  in  many  cases  European  countries  as  well,  the  aggregate 
of  expenses  incurred  within  a  single  year  totals  to  a  vast  sum. 
This  money,  of  course,  must  come  from  the  policyholders 
through  their  yearly  contributions  of  premiums.  The  prob- 

209 


210       THE  PRINCIPLES  OP  LIPE  INSURANCE 


lems  arise  in  large  part  through,  the  difficulty  of  determining 
what  portion  of  particular  items  of  expense  shall  be  charged 
against  one  policyholder  as  compared  with  another. 

Classification  of  Expenses. —  Many  classifications  of  life- 
insurance  expenses  have  been  made,  often  in  a  more  or  less 
formal  way  or  with  no  other  purpose  than  to  abbreviate  a  long 
and  complex  list  of  items.  But  classifications  of  any  sort  can 
be  justified  only  on  the  ground  that  they  serve  to  clear  up 
points  at  issue,  and  the  purpose  of  a  classification  of  life-in- 
surance expenses  should  be  a  clear  statement  of  the  problems 
of  loading.  The  following  division  of  expenses  into  five 
groups  was  made  by  an  actuary  x  and  based  on  a  scrutiny  of 
companies'  statements: 

1.  New  business  expenses 

Examination  fees,  medical  expenses 

Agents'  first  year  commissions 

Advertising,  printing  and  salaries 
incurred  in  getting  new  business 
2i  Collection  expenses 

Agents'   renewal  commissions 

Collection  fees 

Exchange 

Taxes  on  premiums 

3.  Settlement  of  claims 

Investigation  of  death  claims 
Resisting  unjust  claims 

4.  Investment  expenses 

Cost  of  making,  handling  and  pro- 
tecting investments 
Bad  debts 
Losses  over  gains 
Taxes  and  repairs  on  assets 

5.  General  expenses 

General  supervision 
Actuarial 
Clerical 
Salaries 


80  per  cent,  of  first 
year's  premiums. 


10  per  cent,   of  re- 
newal premiums. 


/2  per  cent,  of  face 
value  of  death 
claims. 


per  cent,  per  an- 
num on  assets. 


$1.00  per  $1,000  in- 
surance per  year. 


i  WHITING,  WM.  D.,  "Provision  for  Expenses,"  Tale  Readings  in 
Insurance,  Life,  176-177. 


THE  GROSS  PREMIUM  — LOADING  2li 

The  estimated  amounts  of  each  group  of  expenses,  as  shown 
.at  the  right-hand  side  of  the  page,  is  intended  to  be  approxi- 
mate only  and  will  vary  with  different  companies.  The  value 
of  these  estimates  lies  in  the  fact  that  each  group  of  expendi- 
tures is  thus  related  to,  and  its  amount  dependent  upon,  some 
other  factor,  such  as  premium,  assets,  etc.  New  business  ex- 
penses fall  heavily  on  the  first  premium  and  vary  in  direct 
ratio  to  the  amount  of  the  premium,  due  largely  to  the  neces- 
sity of  paying  agents'  commissions  as  a  percentage  of  the  pre- 
mium. Collection  expenses  likewise  vary  with  the  amount  of 
the  premium  but  are  incurred  in  approximately  equal  amounts 
over  a  series  of  years.  The  cost  of  settling  claims  falls  at 
the  close  of  the  policy  term,  and  bears  a  close  relation  to  the 
amount  of  the  claim.  Investment  expenses  vary  with  the 
amount  of  the  total  assets  and  can  with  fairness  be  deducted 
from  the  gross  income  on  investments.  General  expenditures 
are  for  the  benefit  of  all  and  probably  bear  as  close  a  relation 
to  the  amount  of  insurance  as  to  any  other  single  item. 

In  summarizing  these  different  factors  of  expense  it  is 
found  that  some  vary  with  the  size  of  the  premium  charged, 
.some  with  the  amount  of  insurance  carried,  some  have  no  rela- 
tion to  either.  One  group  of  expenses  is  incurred  wholly 
within  the  first  year  of  insurance,  other  groups  annually  dur- 
ing the  policy  term  and  still  others  only  at  the  time  when  the 
•claim  is  finally  satisfied.  This  statement  sets  in  relief  the 
factors  that  determine  expenses  attributable  to  any  policy  and 
makes  possible  a  statement  of  the  two  great  problems  of  load- 
ing, aside  from  the  mere  matter  of  collecting  sufficient  money 
to  pay  all  expenses.  These  problems  are  respectively  (1)  the 
equitable  distribution  of  expenses  between  different  classes  of 
policies  and  between  policyholders  at  different  ages  —  the 
problem  of  making  each  policy  pay  its  own  cost;  and 
(2)  the  incidence  of  expense,  or  the  problem  of  meeting  the 
expense  when  it  is  incurred.  The  solution  of  these  problems 
is  complicated  by  the  necessity  of  maintaining  a  level  office 
premium,  of  living  up  to  statutory  requirements  as  to  reserves, 
of  maintaining  a  consistent  policy  regarding  surrender  values 


212        THE  PEINCIPLES  OF  LIFE  INSUKANCE 

and  dividends,  and  finally  of  meeting  the  competition  of  other 
companies. 
The  Problem  of  Equitable  Distribution  of  Expenses.— 

The  above  method  of  establishing  a  relationship  between  each 
group  of  expenses  and  some  other  factor,  such  as  premiums, 
face  of  policy  or  total  assets,  furnishes  a  means  of  estimating 
the  effect  of  age  or  kind  of  policy  on  the  actual  cost  of  writing 
and  caring  for  any  policy;  for  with  two  groups  of  expenses 
dependent  on  the  size  of  the  premium  and  two  on  the  face 
amount  of  the  policy,  it  is  necessary  only  to  know  the  premium 
charged  and  the  face  amount  of  the  policy  in  order  to  ascertain 
approximately  the  expenses  incurred  in  handling  any  particu- 
lar contract. 

The  two  tables  shown  on  the  following  page  are  based  on 
policies  for  $1,000,  the  premiums  used  being  the  office  pre- 
miums charged  by  a  well-known  company.  As  the  premiums 
increase  with  age  and  for  the  more  expensive  policies,  it 
will  be  noticed  that  the  expense  of  writing  the  policy  be- 
comes greater  (column  1  either  table)  since  this  expense 
varies  with  the  amount  of  the  premium;  on  the  ordinary 
life  policy  this  cost  is  $14.72  at  age  21  as  compared  with 
$76.11  at  age  65.  The  same  variations  are  found  by  compar- 
ing ten-year  term  and  twenty-year  endowment  policies.  Col- 
lection costs  likewise  vary  with  the  increase  in  premium  due 
to  advancing  age  or  kind  of  policy.  Settlement  expenses  and 
general  expenses,  however,  remain  the  same  on  every  policy 
and  for  every  age  irrespective  of  changes  in  premiums.  Since 
investment  expenses  are  incidental  to  the  handling  of  invest- 
ments they  are  usually  deducted  from  the  gross  earnings  on 
total  assets  and  no  attempt  is  made  to  charge  them  in  any  way 
against  particular  policies.  They  do  not,  therefore,  enter  into 
the  problem  of  loading.  The  four  groups  of  expenses  that 
must  be  provided  for  by  loading  the  net  premium  may  thus 
be  combined  into  two  classes:  those  which  vary  with  the 
amount  of  the  premium  and  those  which  remain  constant  for 
each  $1,000  of  insurance,  or  vary  with  the  face  value  of  the 
policy. 


THE  GROSS  PREMIUM  —  LOADING 


213 


I! 

51 

>  O 

I  1 


e* 


(2) 

COLLECTIONS 
10  PER  CENT. 
OF  RENEWAL 
PREMIUMS 


O  0 

O  O 


§00000 
q  o  q  o  o 
id  td  td  td  id  >o 


Tt<  GO  ^  0  CO 
i-H   r-H  (M   CO  1O 


O  10  "*  10  CO  T* 

TJH  CO  OS   "*  GO  r-H 

GO*  CM  O*  td  CM*  td 
I-H  (M  CO  •*  t-  05 


i—  i  O  O  O  O  lO 

oa  co  TJH  »o  CD  o 


w 


B  1 

s  *i 

S  o 


t-i    o> 

n 

II 


31*51 
IB-ill 

lain 


*Cq  JGJ 


^  §a^i 

—    pq  p.  H  a 

U    05    M 


o  o  o  o 
q  q  q  q 

id  o  to  io* 


(M  CO  TH  C<J         I-H 

eo  -q  q  cq       q 

I-H  I-H  CM  CO*         »d 


CO 
O 


1C  r-H   00  t-- 

to  CM  q  cs 

O  (M*  I-H  GO*         O 

r-H  r-H  (M   CM  •* 


214        THE  PEINCIPLES  OF  LIFE  INSURANCE 

Methods  of  Loading. —  An  equitable  system  of  loading 
must,  as  stated,  require  every  policyholder  to  pay  the  expenses 
which  his  policy  costs  the  company,  as  nearly  as  this  amount 
can  approximately  be  determined.  Since,  therefore,  certain 
expenses  vary  with  the  amount  of  the  premium,  they  can  be 
assessed  equitably  by  making  the  loading  a  percentage  of  the 
net  premium,  this  percentage  to  be  of  such  size  that  the  com- 
pany will  collect  in  the  aggregate  sufficient  loading  to  pay  all 
expenses  of  new  business  and  collections.  General  expenses 
and  settlement  costs,  since  they  do  not  vary  with  the  amount 
of  the  premium,  but  are  a  proper  charge  against  the  face  value 
of  the  policy,  can  be  provided  for  by  adding  to  the  net  pre- 
mium a  constant  sum  per  $1,000  insurance.  This  constant 
must  likewise  be  so  fixed  that  the  aggregate  collected  from  all 
policies  will  pay  all  general  and  settlement  costs. 

The  two  methods  of  loading  here  described  are  known  re- 
spectively as  the  percentage  and  the  constant  methods.  They 
have  both  been  used  in  the  past,  sometimes  separately,  some- 
times in  combination.  Nowadays  the  loading  systems  com- 
monly used  are  modeled  closely  on  one  of  the  following:  (1) 
a  straight  percentage  addition  to  the  net  premium,  often  vary- 
ing the  per  cent,  for  the  higher  premium  policies;  (2)  a  modi- 
fied percentage  loading,  the  usual  method  of  which  is  the  addi- 
tion of  a  certain  percentage  of  the  given  net  premium  and  the 
same,  or  sometimes  a  different,  percentage  of  the  net  ordinary 
life  premium  at  the  same  age;  and  (3)  a  constant  and  per- 
centage loading,  whereby  the  net  premium  will  be  increased  by 
a  constant  amount  per  $1,000  insurance  on  all  policies  and  at 
all  ages  plus  a  percentage  of  the  given  net  premium,  or  of 
the  net  premium  and  the  constant. 

The  conclusions  to  be  drawn  from  the  analysis  of  expenses 
made  at  the  beginning  of  this  chapter  are  that  loadings  should 
increase  as  the  amount  of  the  premium  increases,  since  some 
expenses  are  dependent  on  the  size  of  the  premium;  but  they 
should  not  increase  in  the  same  ratio,  since  there  are  some 
expenses  which  do  not  vary  with  the  size  of  the  premiums. 
The  following  tables  show  the  effect  of  loading  on  the  different 


THE  GROSS  PREMIUM  — LOADING 


215 


bases  named.  In  each  case  the  American  Experience  3  per 
cent,  net  premium  has  been  used,  and  the  loading  of  gross 
premiums  has  been  computed  for  specimen  ages  on  an  identi- 
cal policy  and  for  different  kinds  of  policies  at  an  identical 
age,  the  last  column  in  each  case  showing  the  percentage  of  the 
loading  charge  to  the  gross  premium. 

CONSTANT  LOADING 
American  Experience  3  Per  Cent.  Net  Premium  Loaded  $5.00  per 

$1,000  Insurance 
( I )  Illustrating  with  ordinary  life  policy  at  different  ages 


PERCENTAGE 

AGE 

NET  ANNUAL 
PREMIUM 

LOADING 

GROSS 
PREMIUM 

OF  LOADING 
TO  GROSS 

PREMIUM 

^25 

$16.11 

$5.00 

$21.11 

23.7 

35 

21.08 

5.00 

26.08 

19.1 

-vi5 

29.67 

5.00 

34.67 

14.4 

55 

45.54 

5.00 

50.54 

9.9 

65 

76.11 

5.00 

81.11 

6.2 

(2)  Illustrating  with  different  policies,  at  age  35 


POLICY 

NET 
ANNUAL 
PREMIUM 

LOADING 

GROSS 
PREMIUM 

PERCENTAGE 
OF  LOADING 
TO  GROSS 
PREMIUM 

20-year  term    .... 
-"  Ordinary  Life    .  .  . 
20-payment  Life.  . 
20  -  payment     30  - 
year  endowment 
—  20-year  endowment 

'     $10.91 
21.08 
29.85 

34.74 
41.97 

$5.00 
5.00 
5.00 

5.00 
5.00 

$15.91 
26.08 
34.85 

39.74 
46.97 

31.4 
19.1 
14.3 

12.6 
10.6 

The  amount  of  the  total  loading  on  the  different  policies  and 
at  the  several  ages  at  once  reveals  the  defect  of  this  plan. 
The  more  expensive  policies  should  stand  a  greater  share  of 
the  loading  charges  but  do  not.  The  older  ages  and  the  more 
expensive  policies  are,  therefore,  favored  at  the  expense  of  the 
younger  policyholders  and  cheaper  contracts. 

The  simplest  form  of  percentage  loading  is  to  add  the  same 
percentage  of  the  net  premium  to  itself  for  all  policies  and  all 
In  the  illustration  33%  per  cent,  is  used. 


216       THE  PRINCIPLES  OF  LIFE  INSURANCE 


PERCENTAGE  LOADING 
American  Experience  3  Per  Cent.  Net  Premium  Loaded  33J  Per  Cent. 

of  Itself 
( 1 )  Illustrating  with  ordinary  life  policy  at  different  ages 


AGE 

NET 
ANNUAL 
PREMIUM 

LOADING 

GROSS 
PREMIUM 

PERCENTAGE 
OF  LOADING 
TO  GROSS 
PREMIUM 

-25 
35 
~45 
55 

65 

$16.11 
21.08 
29.67 
45.54 
76.11 

$  5.37 
7.03 
9.89 
15.18 
25.37 

$  21.48 
28.11 
39.56 
60.72 
101.48 

25 

25 
25 
25 
25 

(2)  Illustrating  with  different  policies  at  age  35 


PERCENTAGE 

POLICY 

NET 
ANNUAL 
PREMIUM 

LOADING 

GROSS 
PREMIUM 

OF  LOADING 
TO  GROSS 
PREMIUM 

20-year  Term   

$10.91 

$  3.64 

$14.55 

25 

—  Ordinary  Life  .... 

21.08 

7.03 

28.11 

25 

20-payment    Life.  . 

29.85 

9.95 

39.80 

25 

20-payment  30-year 

Endowment   .... 

34.74 

11.58 

46.32 

25 

—  20-year  Endowment 

41.97 

13.99 

55.96 

25 

By  this  method  the  total  loadings  increase  for  the  higher- 
priced  policies,  but  a  glance  at  the  last  column,  showing  the 
percentage  of  loadings  to  gross  premiums  shows  that  the  ratio 
of  loadings  to  premiums  remains  constant.  This  is  unfair  to 
the  older  ages  and  higher-priced  policies  since,  with  certain 
expenses  remaining  constant,  the  ratio  of  loadings  to  total 
premiums  should  decrease  as  rates  go  up.  Some  companies 
attempt  to  make  an  adjustment  between  different  policies  by 
varying  the  percentage  loading  as,  for  instance,  30  per  cent. 
on  term,  25  per  cent,  on  ordinary  life,  20  per  cent,  on  limited- 
payment  life  and  on  endowments,  and  16%  per  cent,  on 
limited-payment  endowments.  The  following  table  shows  the 
results  of  this  method  on  the  five  policies  used : 


THE   GROSS   PREMIUM  — LOADING 


217 


PERCENTAGE  LOADING 

American  Experience  3  Per  Cent.  Net  Premium,  Age:  35,  Varying 
the  Percentage  on  Different  Policies 


POLICY 

J| 

LOADING 

GROSS 
PREMIUM 

CJ 

fi 
23 
20 
16% 

14 
16% 

EH         § 

ay 

AMOUNT 

20-year  Term  

$10.91 
21.08 
29.85 

34.74 
41.97 

30 
25 
20 

16% 
20 

$3.27 
5.27 
5.97 

5.79 
8.39 

$14.18 
26.35 
35.82 

40.53 
50.36 

Ordinary  Life  

20-payment  Life  
20-payment    30-year 
Endowment  

20-year  Endowment. 

A  comparison  of  total  loadings  and  of  the  ratio  of  loadings  to 
premiums  here  shows  a  progressive  increase  in  the  amount  of 
loading  as  premiums  increase,  combined  with  a  decrease  in  the 
ratio  of  loading  to  premiums.  The  exception  is  the  limited- 
payment  endowment.  This  plan  is  flexible,  since  by  varying 
the  percentage  in  any  case  further  adjustment  is  possible. 
Below,  the  n^et  premium  is  loaded  IS^  per  cent,  plus  I2y2 
per  cent,  of  the  net  ordinary  life  premiums  at  the  same  age. 

MODIFIED  PERCENTAGE  LOADING 

American  Experience  3  Per  Cent.  Net  Premium  Loaded  12%   Per 
Cent,  plus  12%  Per  Cent,  of  Ordinary  Life  Net  Premium 
(1)  Illustrating  with  ordinary  life  policy  at  different  ages 


LOADING 

j 

| 

lUg 

o 

AGE 

gg 
*  5 
Z  * 

<1  w 

III 

g&dl 

Sjfl 

^^g| 

3 

g 

03    W 

g|c«S 
eS  ^  o  R 

|SS  | 

w  ^"* 

r^»  O  PH 

^N.    Q      Q    p  | 

^ 

o  p^ 

^   O  EH  PH 

fc 

<M 

rH 

g 

Ci5 

Pn 

25 

$16.11 

$2.01 

$2.02* 

$  4.03 

$20.14 

20 

35 

21.08 

2.63 

2.64* 

5.27 

26.35 

20 

45 

29.67 

3.71 

3.71 

7.42 

37.09 

20 

55 

45.54 

5.69 

5.69 

11.38 

56.92 

20 

65 

76.11 

9.51 

9.52* 

19.03 

95.14 

20 

*  The  difference  of  one  cent  from  the  figure  in  the  previous  column 
results  because  the  fractional  part  of  a  cent  was  dropped  in  the  first 
case  and  when  included  with  the  same  fraction  in  the  second  case 
equalled  more  than  one-half  cent. 


218       THE  PKINCIPLES  OF  LIFE  INSUKANCE 


(2)   Illustrating  with  different  policies  at  age  35 


I 

X>ADING 

H 

H    >    H 

POLICY 

h 

!*B 

P 

o 

&    £1 

P  gr  fl 

w  ^  w  w 

i 

^5   O  P^   ^ 

•<"]     ^ 

PM  ^^  iij 

fW  ^^  ^  W 

^ 

/.  - 

&j  H^  ^^    — 

C-i     ^ 

W  ^    "^ 

CO  &j                & 

o 

CO    03 

O  CT,  o  M 

1 

2° 

<M 

1 

O 

£°H 

20-year  Term  .  . 

$10.91 

$1.36 

$2.64 

$4.00 

$14.91 

26.6 

Ordinary   Life. 

21.08 

2.63 

2.64 

5.27 

26.35 

20 

20  -  payment 

Life    

29.85 

3.73 

2.64 

6.37 

36.22 

17  fi 

20-payment  30- 

X  1  *U 

year    Endow- 

ment   ..... 

34.74 

4.34 

2.64 

6.98 

41.72 

Ifi  7 

20-year  Endow- 

J.U. f 

ment    

41.97 

5.25 

2.64 

7.89 

49.86 

15.8 

Total  loadings  here  increase  with  increase  in  age  and  with  the 
more  expensive  kinds  of  policies ;  but  a  glance  at  the  last  col- 
umn of  the  first  table  shows  that  the  ratio  of  loadings  to  pre- 
miums does  not  decrease  as  desired  with  the  advance  in  age. 
Were  the  results  computed  for  limited-payment  life  or  en- 
dowment policies  at  different  ages  these  ratios  would  actually 
increase  with  age.  This  plan,  therefore,  while  making  pos- 
sible approximate  adjustments  between  policies,  does  not 
adjust  loadings  equitably  between  young  and  old  entrants. 
In  spite  of  its  defect,  there  is  probably  no  other  method  of 
loading  so  generally  used  at  the  present  time  as  this. 

The  constant  and  percentage  method,  as  stated,  adds  a  con- 
stant plus  a  per  cent,  of  the  net  premium,  in  the  illustration 
a  $2.00  constant  plus  20  per  cent. 

This  method  seems  more  nearly  to  approach  the  result  de- 
sired than  any  other.  Total  loadings  increase  with  premiums 
but  the  ratio  of  loadings  to  premiums  decreases  and  equity  is 
thus  preserved  between  different  ages  and  different  policies. 

It  will  be  understood  of  course  that  the  additions  made  in 
each  case  above  are  merely  illustrative  of  the  methods  used 
and  that  the  percentage  or  the  constant  actually  added  by  a 


THE  GROSS  PREMIUM  — LOADING 


219 


CONSTANT  AND  PERCENTAGE  LOADING 

American  Experience  3  Per  Cent.  Net  Premium  Loaded  20  Per  Cent. 

Plus  $2.00  Constant 
(1)   Illustrating  with  ordinary  life  policy  at  different  ages 


LOADING 

P 

1  *    ' 

H 
fc         S 

a 

AGE 

£S 

FH     ?q 

H 
fe 
3 

P 

i!  i  s  i 

P5   ^^      M 

EH 

lj 

QD    S 

w  —  C^    _ 

^^  w 

^    r      Q 

OQ 

5 

72    oq 

O     r          V      ftf 

w  k 

PM  Sfl 

0 

I 

i 

O 

«   0   §PlH 

25 

$16.11 

$  3.22 

$2.00 

$  5.22 

$21.33 

24.5 

35 

21.08 

4.22 

2.00 

6.22 

27.30 

22.8 

45 

29.67 

5.93 

2.00 

7.93 

37.60 

21.1 

55 

45.54 

9.11 

2.00 

11.11 

56.65 

19.6 

65 

76.11 

15.22 

2.00 

17.22 

93.33 

18.5 

(2)   Illustrating  with  different  policies  at  age  35 


LOADING 

ij 

H 

0 

g  a 

55     3 

H 

1 

C3    M    02    J^ 

W     M 

to 

M 

^   ^   M   5 

POLICY 

"*i  | 

^^     1 

g 

53 

02   H 

gSo  e| 

H  r^j 

^"1  S  Q, 

^ 

H 

O  Q, 

p^  S  ti  Cu 

* 

o 

8 

e 

O 

w  u 

20-year    Term  

$10.91 

$2.18 

$2.00 

$  4.18 

$15.09 

27.7 

Ordinary  Life     .  .  . 

21.08 
29.85 

4.22 
5.97 

2.00 
2.00 

6.22 
7.97 

27.30 

37.82 

22.8 
21.0 

20-payment  Life.  .  .  . 

20-payment    30-year 
Endowment     

34.74 

6.95 

2.00 

8.95 

43.69 

20.5 

20-year  Endowment. 

41.97 

8.39 

2.00 

10.39 

52.36 

19.8 

company  to  its  net  premiums  must  be  made  with  reference  to 
the  actual  expenses  of  the  company. 

Loading  and  the  Incidence  of  Expense. —  The  problem 
of  making  each  policy  pay  its  own  cost,  as  just  discussed,  is  a 
matter  of  doing  justice  to  each  insured  person.  From  the 
standpoint  of  the  company,  however,  this  factor  is  not  of  the 
same  immediate  importance  as  that  of  the  incidence  of  ex- 


220        THE  PRINCIPLES  OF  LIFE  INSURANCE 


pense,  or  the  problem  of  meeting  the  expense  when  it  occurs. 
If  the  office  premiums  charged  for  an  ordinary  life  and  a 
twenty-year  endowment  policy,  each  issued  at  age  35,  are  re- 
spectively $27.00  and  $50.00  and  if  expenses  are  incurred  on 
these  policies  in  the  proportion  shown  in  the  classified  list  of 
expenses  on  page  210  the  following  brief,  table  will  show  the 
amount  of  expense  and  the  time  when  it  is  incurred : 

.AMOUNT  AND  INCIDENCE  OF  EXPENSE  ON  Two  POLICIES 

Ordinary  Life.     Age:  35.     Office  Premium:  $27.00 
Twenty-year  Endowment.     Age:  35.     Office  Premium:  $50.00 


CLASS  OF  EXPENSE 

AMOUNT  OF  EXPENSE 

WHEN 
INCURRED 

On  Ordinary 
Life 
(  Premium 
$27.00) 

On  20-Year 
Endowment 
(  Premium 
$50.00) 

2 
3 

4 
5 

General  —  $1.00  per 
$1,000  insurance. 
Investment  —  y2  per 
cent,  of  assets.  .  . 
Collections  —   10 
per    cent,    of    re- 
newals 

$1.00 

2.70 

15.00 
21.60 

$1.00 

5.00 

15.00 
40.00 

Yearly 
Yearly 

Yearly  after 
first  year 

Last  year 
only 

First  year 
only 

Settlements  —  iy2 
per        cent.        of 
amount  of  insur- 
ance     
New   business  —  80 
per  cent,  of  first 
premium    . 

The  net  premiums  on  these  two  policies  are  $21.08  and  $41.97, 
making  the  loading,  or  the  amount  available  annually  for  ex- 
penses, respectively  $5.92  and  $8.03.  These  sums  will  easily 
provide  for  the  annual  charge  of  $1.00  for  general  expenses, 
for  the  cost  of  collections  and  will  leave  a  surplus  at  the 
maturity  of  the  policy  to  pay  $15.00  for  settlement  of  the 
claim.  The  investment  costs,  as  already  explained,  are  de- 
ducted from  gross  interest  earnings  and  do  not  therefore  affect 
the  problem  of  loading.  The  last  item,  or  cost  of  new  busi- 
ness, that  is  the  cost  of  writing  tiie  policy,  paying  the  agent's 


THE  GROSS  PREMIUM  — LOADING          221 

commission,  medical  examination  fees,  etc.,  incurs  a  total 
charge  at  the  time  of  issuing  the  policy  of  $21.60  in  one  case 
and  $40.00  in  the  other.  Herein  lies  the  great  problem  of  the 
incidence  of  expense,  for  these  policies  cannot  pay  their  first- 
year  costs  from  the  loading  available  from  the  first  premium. 
These  expenses  must  be  met  when  incurred  and  yet  the  com- 
pany faces  the  necessity  of  maintaining  the  regular  level  office 
premium,  of  paying  death  claims  at  the  close  of  the  first  year 
and  of  holding  in  reserve  the  remainder  of  the  net  premium. 
The  net  premium  of  $21.08  on  the  ordinary  life  policy  at  age 
35  increased  at  3  per  cent,  interest  accumulates  to  $21.71  at 
the  close  of  the  year.  Of  this  amount  $8.83  is  necessary  to 
pay  the  estimated  costs  of  insurance  for  the  year  a,nd_$12.88 
constitutes_.the__reserva-that  should,  .be  held  in  anticipation  of 
future  claims  against  the  policy.  The  loading  is  the  only 
portion  of  the  first  premium  that  is  available  therefore  to  pay 
first  year's  expenses.  For  this  reason  a  company  cannot 
maintain  its  level  office  premium  and  hold  the  full  net  pre- 
mium reserve  from  the  start,  and  at  the  same  time  make  every 
policy  pay  its  own  way.  The  first  year's  requirements  are 
greater  than  the  funds  on  hand.  These  first-year  costs  must 
be  provided  from  some  outside  source,  or  some  modification  of 
the  system  of  legal  reserve  valuations  must  be  made  whereby 
the  reserve  of  the  first  year,  or  a  portion  thereof,  can  be  used 
to  pay  them.  For  an  old  and  well  established  company  with 
a  large  surplus  accrued  the  solution  of  the  problem  is  com- 
paratively simple,  for  it  can  pay  expenses  of  new  business  from 
surplus  and  depend  on  replacing  the  amount  from  margins  in 
the  loadings  of  the  later  premiums.  This,  however,  is  not 
possible  for  new  companies,  for  they  have  no  surplus  from 
which  to  borrow ;  and  it  results  in  slow  growth  of  small  com- 
panies, whose  surplus  is  insufficient  to  supply  the  demands  of  a 
rapidly  increasing  business. 

One  proposed  method  of  meeting  new  business  expenses  as 
incurred  and  thereby  making  every  policy  self-sustaining  has 
been  to  charge  a  cash  initiation  fee,  or  issue  an  interest-bearing 
note  or  lien  against  the  policy  to  be  paid  by  the  application  of 


222          THE  PRINCIPLES  OF  LIFE  INSURANCE 

dividends  or  in  some  similar  way.  But  this  plan  has  many 
practical  objections,  chief  among  which  is  the  departure  from 
the  level-premium  idea,  and  has  never  been  favored  by  the 
companies. 

There  exists  the  further  possibility  of  dealing  with  this  prob- 
lem through  some  modification  of  the  system  of  valuing  re- 
serves, whereby  the  reserve  of  the  first  year  or  of  the  first  few 
years  can  be  used  to  pay  new  business  expenses.  Three 
methods  of  modifying  the  full  net  premium  reserves  are  used 
in  the  United  States  to-day,  known  respectively  as  preliminary- 
.term,  modified  preliminary-term,  and  select  and  ultimate 
valuation.  The  germ  of  the  preliminary-term  idea  was  intro- 
duced into  the  United  States  from  Europe,  the  product  of  a 
great  German  actuary,  Dr.  Zillmer.  It  provides  that  the  first 
year's  premium  under  any  form  of  policy  shall  pay  for  term 
insurance  for  one  year,  and  that  the  regular  policy  is  to  come 
into  operation  one  year  later  than  the  date  of  issue,  and  will 
be  for  a  term  one  year  shorter.  By  this  means  the  company  is 
relieved  of  the  necessity  of  establishing  a  reserve  against 
the  policy  for  the  first  year,  and  the  entire  premium  becomes 
available  for  payment  of  current  claims  and  expenses.  This, 
of  course,  releases  the  first  year's  reserve  for  the  payment  of 
new  business  expenses.  It  becomes  in  effect  a  borrowing  of 
the  reserve  for  this  purpose.  On  the  ordinary  life  policy  at 
age  35  the  reserve  thus  released  would  be  $12.88;  on  the 
twenty-year  endowment  at  the  same  age,  $34.59.  The  net 
premium  for  the  later  years  of  the  policy  is  then  increased. 
It  becomes  the  net  premium  for  an  insurance  issued  at  an  age 
one  year  higher,  at  a  date  one  year  later  and  for  a  term  one 
year  shorter ;  and  the  reserves  held  on  the  policy  for  the  second 
and  later  years  are  the  reserves  based  on  this  new  net  premium. 
Thus  an  ordinary  life  policy  at  age  35  becomes  a  one-year  term 
insurance  plus  an  ordinary  life  at  age  36 ;  a  twenty-payment 
life  policy  becomes  a  one-year  term  plus  a  nineteen-payment 
life  at  age  36;  and  a  twenty-year  endowment  becomes  a  one- 
year  term  and  a  nineteen-year  endowment  at  age  36. 

There  are  two  fundamental  objections  to  preliminary-term 


THE  GROSS  PREMIUM  — LOADING  223 

insurance  as  a  method  of  meeting  new  business  expenses.  In 
the  first  place  no  distinction  is  made  between  ordinary  life 
policies  and  limited-payment  life  or  endowment  contracts,  and 
the  company  is  permitted  to  spend  the  entire  first-year  reserve 
on  the  more  expensive  contracts  for  soliciting  new  business  in 
the  same  way  as  the  comparatively  small  reserve  on  the  ordi- 
nary life  policy.  Thus,  on  a  ten -year  endowment  at  age  35  a 
reserve  of  $83.78  is  released.  This  offers  great  temptation  to 
company  officials  desiring  to  extend  their  business  and  in  too 
many  cases  in  the  past  has  led  to  gross  extravagance.  If 
$12.88  in  addition  to  the  first  year's  loading  is  sufficient  to 
pay  new  business  expenses  on  an  ordinary  life  policy  it  should 
not  require  a  great  deal  more  than  this  amount  on  any  other 
kind  of  policy,  and  the  company  which  uses  the  entire  $83.78 
on  the  ten-year  endowment  is  misusing  its  funds. 

The  second  objection  to  preliminary- term  insurance  is  that 
the  company  is  given  the  entire  premium-paying  period  of 
the  policy  to  pay  back  this  borrowed  reserve.  By  considering 
the  ordinary  life  policy  in  question  as  beginning  only  after  the 
one  year's  term  insurance  expires  and  holding  reserves  on  the 
policy  as  though  issued  at  age  36,  the  reserves  throughout  the 
life  of  the  policy  are  smaller  than  the  full  net  premium  re- 
serves and,  though  the  difference  between  them  becomes  smaller 
each  additional  year,  they  do  not  coincide  until  the  insured 
reaches  age  96,  when  all  reserves  equal  the  face  of  the  policy. 
In  other  words,  should  the  holder  of  an  ordinary  life  policy 
valued  on  the  preliminary-term  plan  die  at  any  time  before  age 
96  the  company  will  not  have  entirely  replenished  the  reserve 
borrowed  for  the  purpose  of  writing  its  policy  and  the  defi- 
ciency must  be  made  up  from  funds  which  should  be  diverted 
to  other  uses.  In  the  same  manner  with  a  twenty-year  en- 
dowment the  entire  twenty  years  is  given  to  replenish  the  de- 
pleted reserves ;  with  a  limited-premium  policy  the  reserves  will 
be  brought  up  to  the  full  net  premium  standard  only  upon  the. 
completion  of  premium  payments.  A  comparison  of  the  full 
net  premium  and  preliminary-term  reserves  on  a  twenty-year 
endowment,  as  shown  in  the  table  on  page  227,  will  reveal  this 
defect  very  clearly. 


224       THE  PRINCIPLES  OF  LIFE  INSURANCE 

The  first  objection  to  preliminary-term  valuation  is  cor- 
rected by  the  plan  known  as  modified  preliminary-term.  It 
consists  in  making  the  ordinary  life  policy  the  basis  on  which 
borrowing  from  the  reserve  is  permitted.  But  one  rate  is 
allowed  for  the  term  insurance  at  each  age  and  this  is  the  rate 
on  the  ordinary  life  policy  at  the  next  age,  thereby  permitting 
the  net  premium  to  remain  level.  For  instance  at  age  35  the 
net  premium  for  the  one-year  term  insurance  is  equal  to 
$21.74,  or  the  net  annual  premium  on  a  whole-life  policy  issued 
at  age  36,  and  this  entire  amount  is  available  for  payment  of 
expenses  and  death  claims  for  the  first  year.  The  life  policy 
begins  the  year  following  and  the  same  premium  of  $21.74, 
being  the  correct  net  premium,  payable  from  age  36,  is  paid 
thereafter  and  the  regular  reserve  established  for  a  policy 
issued  at  age  36.  For  contracts  requiring  higher  premiums 
than  the  ordinary  life  the  net  premiums  are  determined  as 
follows.  On  limited-premium  policies  they  are  equal  to  the 
net  premium  for  the  ordinary  life  preliminary-term  rates  at 
the  same  age  plus  a  net  premium  sufficient  to  purchase  a  pure 
endowment  maturing  at  the  end  of  the  premium-paying  period 
for  an  amount  equal  to  the  difference  between  the  preliminary- 
term  reserve  on  the  ordinary  life  policy  at  that  time  and  the 
reserve  on  a  paid-up  policy.  In  other  words  the  added  net  pre- 
mium purchases  a  pure  endowment  sufficient  to  make  the  pol- 
icy paid-up  at  the  end  of  the  premium-payment  period.  For 
endowment  policies  the  net  premium  added  above  the  ordinary 
life  net  premium  is  for  a  pure  endowment  sufficient  to  mature 
the  policy,  or  a  pure  endowment  for  the  difference  between  the 
face  of  the  policy,  $1,000,  and  the  ordinary  life  preliminary- 
term  reserve  at  the  date  when  the  endowment  would  mature. 
The  table  on  page  227  shows  that  the  preliminary-term  reserve 
at  the  end  of  the  twentieth  year  on  the  ordinary  life  policy  is- 
sued at  age  35  is  $318.81.  The  reserve  on  the  twenty-year  en- 
dowment must,  of  course,  be  $1,000  at  this  time  or  $681.19 
more  than  the  above  reserve.  The  net  premium  on  the 
twenty-year  endowment  will,  therefore,  be  equal  to  the  net 
premium  on  the  ordinary  life  plus  a  net  premium  sufficient 


THE  GROSS  PREMIUM  — LOADING  225 

to  purchase  a  pure  endowment  of  $681.19.  A  comparison  of 
columns  4  and  6  of  the  table  in  question  shows  that  modified 
preliminary-term  valuation  does  not  remove  the  second  objec- 
tion to  preliminary-term  insurance.  A  reserve  is  established 
the  first  year  to  be  sure  and  it  is  higher  throughout  the  life 
of  the  policy  than  on  the  full  preliminary-term  standard  but 
it  is  consistently  lower  than  the  full  net-premium  reserve 
shown  in  column  4. 

The  third  method  of  valuation  referred  to,  known  as  select 
and  ultimate,  takes  advantage  of  a  factor  unheard  of  in  any 
of  the  previous  standards.  This  is  the  fact  that  net  premiums 
are  calculated  on  the  basis  of  an  ultimate  table  of  mortality 
while  the  insured  is  subject  to  a  select  rate  of  mortality  during 
the  years  immediately  following  the  issue  of  his  policy. 
Select  mortality,  as  defined  in  Chapter  XI,  is  the  mortality 
resulting  among  risks  that  have  recently  passed  a  medical 
examination.  The  effect  of  medical  selection  was  found  to 
last  for  about  five  years  and  mortality  rates  based  on  the  ex- 
perience of  these  first  five  years  after  medical  examination 
are  known  as  select  rates.  The  experience  of  the  later  years 
is  known  as  ultimate  mortality,  and  it  was  on  these  latter  data 
that  the  American  Experience  table  was  constructed.  There- 
fore, a  company  basing  its  rates  on  the  American  Experience 
table  will  find  that  it  has  an  excess  of  premiums  during  the 
first  five  years  of  insurance  because  the  risk  has  been  newly  ex- 
amined and  is  in  the  "  select "  class.  A  benefit  naturally  ac- 
crues to  any  company  from  the  acceptance  of  risks  thus  sub- 
ject to  a  lower  mortality.  But  the  first  year  of  insurance  is 
the  year  of  high  expenses.  It  is  proper  therefore  to  balance 
this  select  mortality  against  the  high  expenses  and  to  allow  the 
company  the  right  to  use  the  savings  due  to  lower  mortality 
in  paying  the  necessarily  high  costs  of  writing  the  insurance. 
In  this  way  every  policyholder  will  be  required  to  pay  his  own 
way  in  the  company.  The  present  valuation  standards  of  the 
state  of  New  York  permit  any  company  to  use  the  benefits  of 
fresh  selection  in  addition  to  the  loading  on  the  first  year's 
premium  to  pay  new  business  expenses.  The  method  of  com- 


226          THE  PRINCIPLES  OF  LIFE  INSURANCE 

puling  the  present  value  of  the  assumed  savings  due  to  medical 
selection  is  too  complex  to  consider  here.2 

The  table  on  page  227  shows  select  and  ultimate  reserves  on 
an  ordinary  life  and  a  twenty-year  endowment  policy.  The 
difference  from  the  full  net  premium  standard  is  marked  the 
first  year.,  of  course,  but  is  very  small  thereafter  and  the  two 
standards  coincide  for  the  fifth  terminal  reserve.  In  other 
words,  the  select  and  ultimate  method  permits  the  company 
to  borrow  from  the  full  net  premium  reserve  a  sum  of  money 
which  will  never  have  to  be  repaid  because  the  mortality  which 
would  require  it  will  never  occur.  But  at  the  end  of  five  years 
the  company  must  hold  the  full  net  premium  reserve  on  the 
policy.  Herein  lies  the  great  difference  between  the  select 
and  ultimate  method  and  the  two  preliminary-term  standards ; 
for  with  the  latter  the  reserve  never  reaches  the  full  standard 
until  the  policy  matures  other  than  by  death,  or  until  all  pre- 
miums have  been  paid.  The  select  and  ultimate  standard 
recognizes  the  benefits  to  the  company  of  getting  new  policy- 
holders  and  permits  the  spending  of  the  amount  necessary 
to  get  them,  but  it  does  not  allow  this  necessary  expense  to 
become  a  discredit  by  spreading  itself  over  a  long  period  of 
time. 

In  actual  practice  there  are  many  modifications  of  the  sys- 
tems of  reserve  valuations  that  cannot  be  considered  here. 
The  laws  of  New  Jersey,  for  instance,  permit  the  use  of 
modified  preliminary-term  valuation  but  require  the  deficiency 
in  reserves  to  be  made  good  in  seven  years.  In  Canada  the 
straight  modified  preliminary  term  may  be  used  but  must  be 
made  good  in  five  years. 

The  following  table  shows  the  actual  reserves  required  to 
be  held  for  twenty  years  according  to  the  different  standards 
herein  explained,  on  an  ordinary  life  policy  and  a  twenty- 
year  endowment  insurance  issued  at  age  35. 

2HuDNUT,  JAMES  M.,  Practical  Studies  in  Life  Insurance,  51-54. 
An  excellent  description  of  the  method  of  computing  these  savings, 
in  simple  mathematical  language.  This  book  has  much  to  commend 
it  for  the  untechnical  way  in  which  it  explains  many  of  the  complex 
problems  of  insurance  mathematics. 


THE  GROSS  PREMIUM  — LOADING  v 


227 


TERMINAL  RESERVES  ON  DIFFERENT  VALUATION  STANDARDS 
American  Experience  3  Per  Cent.,  Age:  35 


ORDINARY  LIFE 

TWENTY-  YEAR  ENDOWMENT 

1 

2 

3 

4 

5 

6 

7 

H 

w 

• 

&H 

M 

o 

3  g 

3    § 

OHM 

S   M 

9         M 

M             W 

e  g  o 

^3 

EH  H^  ^H 

S    3 

^  <3  ^j 

EH     ^     "^ 

fc      •< 

^H    <J    ^1 

EAR  OF 

IXSUR 

ill 

Sal 

M 

—  .-"'-' 

aJJ 

M            Q 

s  s  fc 

M    M    «ri 

111 

|ll| 

2a§ 

§sg 

|Pw 

^ 

£j 

PH 

02 

£ 

PH 

fc*H 

GQ 

1 

12.88 

6.19 

34.59 

21.99 

28.35 

2 

26.13 

13.42 

22.32 

70.40 

37.16 

58.27 

66.92 

3 

39.76 

27.23 

38.04 

107.50 

75.53 

95.85 

105.93 

4 

53.77 

41.42 

53.33 

145.91 

115.32 

134.77 

145.50 

5 

68.16 

56.00 

68.16 

185.71 

156.53 

175.08 

185.71 

6 

82.94 

70.97 

226.93 

199.24 

216.84 

7 

98.11 

86.34 

02 

269.66 

243.49 

260.12 

03 

8 

113.68 

102.12 

313.94 

289.36 

304.99 

g 

9 

129.65 

118.29 

S-i 

359,85 

336.91 

351.49 

05     3 

10 

146.01 

134.86 

£3 

407.45 

386.22 

399.71 

50    » 

11 

162.76 

151.83 

o.  * 

456.84 

437.38 

449.71 

o-  M 

12 

179.87 

169.17 

^     5* 

508.08 

490.46 

501.66 

E5  2* 

13 

197.35 

186.87 

^  ^ 

561.28 

545.57 

555.55 

P-  tii 

14 

215.16 

204.92 

tf  a 

616.55 

602.81 

611.54 

tr1  a 

fD    O 

15 

233.28 

223.28 

^^a" 

674.00 

662.32 

669.73 

^l-rt 

16 

251.68 

241.92 

S,  ^ 

733.77 

724.24 

730.29 

s>  "1 

17 

274.34 

260.82 

3  3 

796.05 

788.74 

793.37 

»  g 

18. 

289.22 

279.95 

5' 

861.01 

856.03 

859.18 

5* 

19 

308.32 

299.29 

1 

928.91 

926.36 

927.96 

p 

20 

327.58 

318.81 

1,000.00 

1,000.00 

1,000.00 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  Business  of  Life  Insurance,  chap.  17, 
"Anomalies  in  Loading."  Shows  the  glaring  inequity  in 
methods  of  loading  practiced  by  American  companies. 

GIBB,  J.  BURNETT,  "  The  Calculation  of  Life  Office  Premiums." 
Annals  American  Academy  of  Political  and  Social  Science, 
Sept.,  1905,  59-62. 

A  brief  discussion  of  methods  of  loading  to  obtain  equity 
between  different  policies  and  different  ages.  Tables  re- 
ducing results  to  a  percentage  basis  show  the  advantages 
or  defects  of  the  different  methods  very  clearly. 

HOLCOMBE,  JOHN  M.,  "Expenses  for  Agents."  Yale  Readings 
in  Insurance,  Life,  chap.  18.  Presents  arguments  by  the 


228        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

president  of  an  American  company  justifying  expenses  im 
curred  through  agency  systems  on  the  ground  that  in* 
surance  cannot  be  written  without  agents. 

Mom,  HENRY,  Life  Assurance  Primer,  chap.  9,  to  page  121. 

WHITING,  Wm.  D.,  "Provision  for  Expenses."  Yale  Readings 
in  Insurance,  Life,  chap.  12;  reprinted  from  The  Transac- 
tions of  the  Actuarial  Society  of  America,  v.  214r-19. 

An  excellent  discussion,  by  an  actuary,  of  a  scientific 
and  equitable  method  of  assessing  expenses.  Contains  a 
classification  of  expenses  that  affords  an  unusually  good 
analysis  of  the  problems  of  loading  discussed  in  this  chap- 
ter. 


CHAPTER  XVIII 
SURRENDER  VALUES  AND  POLICY  LOANS 

SURRENDER  VALUES 

Meaning  of  the  Term  "  Surrender  Value." — It  was  ex- 
plained in  Chapter  XVI  that  the  level-premium  plan  involves 
the  charging  during  the  early  years  of  the  policy  of  a  net 
premium  which  is  larger  than  necessary  to  pay  for  the  insur- 
ance in  those  years,  with  a  view  to  accumulating  a  fund  suffi- 
ciently large  to  enable  the  company  to  meet  the  cost  of  insur- 
ance in  the  later  years  of  the  life  of  the  insured  when  the 
net  premium  is  insufficient  to  pay  for  the  current  cost  of 
protection.  These  overcharges,  we  saw,  are  credited  to  the 
policy  from  year  to  year  at  an  assumed  rate  of  interest  and 
constitute  the  reserve.  The  manner  in  which  this  reserve 
accumulates  was  illustrated  (page  200)  in  connection  with  a 
$1,000  ordinary  life  policy  at  age  45,  issued  on  the  basis 
of  the  American  Experience  table  and  3  per  cent,  interest. 
It  was  seen  that  the  net  annual  premium  of  $29.67  on  this 
policy  results  in  a  reserve  of  $19.61,  at  the  end  of  the  first 
year,  and  that  thereafter  the  accumulation  to  the  credit  of 
the  policy  continues  to  increase  until,  at  the  end  of  the  fifty- 
first  year  of  the  contract,  or  the  extreme  limit  of  the  insured's 
life  according  to  the  mortality  table,  it  equals  the  face  value 
of  the  policy. 

Now  what  shall  be  done  with  this  fund  in  case  the  in- 
sured wishes  to  surrender  his  policy  or  fails  to  pay  his  pre- 
mium when  due?  It  is  clear  that  under  such  circumstances 
the  company,  since  its  future  liability  under  the  policy 
ceases,  no  longer  requires  the  reserve  —  the  accumulated  over- 
charges in  the  net  premium  —  for  the  purpose  originally 
intended.  Experience  has  shown  that  it  is  not  necessary  for 

229 


230         THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  protection  of  the  company  or  the  other  policyholders  to 
insist  that  the  insured  upon  failing  to  continue  his  premium 
payments  shall  forfeit  the  entire  reserve  value  of  his  policy. 
It  has  therefore  become  a  universal  practice  of  the  companies 
to  permit  the  insured,  in  case  he  surrenders  or  lapses  his 
policy  after  it  has  been  in  force  for  several  years,  to  receive 
all  or  a  designated  percentage  of  its  reserve  value.  This 
allowance  constitutes  the  so-called  "  surrender  value  "  of  the 
policy ;  while  the  portion  of  the  reserve  which  the  policyholder 
forfeits  is  known  as  the  "  surrender  charge." 

Extent  to  Which  Policies  Are  Lapsed  and  Surrendered. 
—  The  importance  of  allowing  surrender  values  and  retain- 
ing surrender  charges  becomes  clear  when  we  observe  the 
great  extent  to  which  life-insurance  policies  are  terminated 
by  lapse  or  surrender.  Thus,  during  the  year  1913,  a  typical 
year  for  illustrative  purposes,  the  total  number  of  policies 
issued  by  all  the  companies  reporting  to  the  Insurance  Depart- 
ment of  the  State  of  New  York  amounted  to  1,015,788 
with  an  aggregate  face  value  of  $1,840,577,945,  while  the 
number  of  policies  terminated  during  the  year  totaled  564,579 
with  a  face  value  of  $1,043,413,871.  The  various  ways  in 
which  these  policies  were  terminated  are  indicated  in  the  fol- 
lowing table: 

TEBMINATED  BY  No.  OF  POLICIES          AMOUNT  OF  IXSUEANCE 

Death     69,442  $    152,764,980 

Maturity    26,568  52,083,622 

Expiry    69,696  106.246,598 

Surrender    172,823  339,861,747 

Lapse    225,051  363,606,021 

Change  or  decrease 999  28,850,903 

564,579  $1,043,413,871 

An  examination  of  the  table  shows  that  of  the  564,579  poli- 
cies terminated  during  1913,  397,874  were  lapsed  or  surren- 
dered, and  that  the  amount  of  insurance  thus  terminated 
equaled  $703,467,768.  In  other  words,  the  number  of  lapsed 
and  surrendered  policies  during  1913  was  equivalent  to  over 


SURKENDEK  VALUES  AND  POLICY  LOANS     231 

39  per  cent,  of  the  total  number  of  policies  written  and  over 
70  per  cent,  of  the  total  number  of  policies  terminated  dur- 
ing the  year.  Slightly  over  twice  as  much  insurance  was 
terminated  by  lapse  and  surrender  as  in  the  regular  ways,  i.e. 
by  death,  maturity,  expiry  or  change.  As  regards  twenty- 
nine  of  the  largest  companies  reported  in  the  Insurance  Year 
Book,  termination  by  lapse  and  surrender  during  the  two 
decades  from  1894  to  1913,  inclusive,  averaged  annually  6.79 
per  cent,  of  the  mean  policies  in  force,  while  during  the  five 
years  1909-1913  the  percentage  averaged  annually  5.09  per 
cent. 

Non-Forfeiture  Laws. —  Although  the  practice  of  allow- 
ing a  surrender  value  in  some  form  is  an  old  one,  it  should 
be  noted  that  for  many  years  the  matter  was  entirely  op- 
tional with  the  companies.  But  while  a  few  companies  exer- 
cised their  discretionary  powers  in  a  liberal  manner,  prac- 
tically all  the  companies  doing  a  general  business  pursued  a 
policy  so  illiberal,  in  nearly  all  instances  allowing  no  value 
whatever  upon  surrender,  that  there  developed  on  the  part  of 
the  public  a  demand  for  legislative  control  of  the  matter,  and 
as  a  result  the  several  states  have  enacted  so-called  "  non- 
forfeiture laws/' *  Mr.  Elizur  Wright  is  given  credit  for 
having  started  the  first  important  campaign  for  such  legisla- 
tion in  the  United  States.  As  a  result  of  his  efforts  the  state 
of  Massachusetts  enacted  a  law  on  May  10,  1861,  which  re- 
quired the  companies  of  that  state  upon  the  surrender  of  a 
policy  to  apply  the  terminal  reserve  by  the  Actuaries'  table 
and  4  per  cent,  interest,  less  a  surrender  charge,  as  a  net  sin- 
gle premium  to  purchase  extended  insurance  for  the  original 
amount,  such  extensions  to  attach  automatically  upon  the  fail- 
ure of  the  insured  to  pay  his  premium  when  due.  Following 
the  enactment  of  this  law  other  states  soon  followed  suit,  and 
at  present  such  legislation  is  general.2 

1  For  a  treatment  of  the  historical  development  of  non-forfeiture 
legislation   and  policy  provisions   see  Miles  M.   Dawson's   Elements 
of  Life  Insurance,  chapter  on  "  Surrender  Values." 

2  The  general  nature  of  non-forfeiture  legislation  is  indicated  by 


232       THE  PEINCIPLES  OF  LIFE  INSURANCE 

All  the  laws  now  in  force  base  the  surrender  value  upon 
the  amount  of  the  reserve  at  the  time  of  lapse  or  surrender, 
and  all  allow  the  companies  to  retain  a  surrender  charge.  In 
most  instances  this  charge  takes  the  form  of  a  stipulated  per- 
centage of  the  amount  of  insurance ;  but  sometimes  it  consists 
of  a  percentage  of  the  reserve,  or  a  percentage  of  the  reserve 
or  of  the  insurance,  whichever  is  greater,  or,  as  in  Massachu- 
setts, a  percentage  of  the  present  value  of  the  future  net  pre- 
miums to  be  paid  under  the  terms  of  the  policy  if  continued. 
As  summarized  by  Mr.  James  M.  Hudnut : 

No  law  has  ever  required  a  surrender  value  of  any  kind 
unless  at  least  two  years'  premiums  have  been  paid.  No  state 
now  requires  non-forfeiture  provisions  until  three  years'  premi- 
ums have  been  paid,  but  all  allow  companies  to  pay  surrender 

the  terms  of  the  New  York  law  applicable  to  poUcies  issued  after 
January  1,  1907.     The  law  reads  as  follows: 

"  If  any  policy  of  life  insurance  ( other  than  a  term  policy  for 
twenty  years  or  less ) ,  issued  on  or  after  January  first,  nineteen 
hundred  and  seven,  by  any  domestic  life  insurance  corporation,  after 
being  in  force  three  full  years  shall  by  its  terms  lapse  or  become 
forfeited  by  the  nonpayment  of  any  premiums  or  any  note  therefor 
or  any  loan  on  such  policy  or  of  any  interest  on  such  note  or  loan, 
the  reserve  on  such  policy  computed  according  to  the  standard 
adopted  by  said  company  in  accordance  with  section  eighty-four  of 
this  chapter,  together  with  the  value  of  any  dividend  additions  upon 
said  policy,  after  deducting  any  indebtedness  to  the  company  and 
one-fifth  of  the  said  entire  reserve,  or  the  sum  of  two  and  fifty  one- 
hundredths  dollars  for  each  one  hundred  dollars  of  the  face  of  said 
policy  if  said  sum  shall  be  more  than  the  said  one-fifth,  shall  upon 
demand  not  later  than  three  months  after  the  date  of  lapse  with 
surrender  of  the  policy  be  applied  as  a  surrender  value  as  agreed 
upon  in  the  policy,  provided  that  if  no  other  option  expressed  in 
the  policy  be  availed  of  by  the  owner  thereof,  and  if  the  policy 
itself  does  not  direct  what  option  shall  become  operative  in  default 
of  selection  by  the  owner,  the  same  shall  be  applied  to  continue  the 
insurance  in  force  at  its  full  amount  including  any  outstanding 
dividend  additions  less  any  outstanding  indebtedness  on  the  policy 
but  without  future  participation  and  without  the  right  to  loans,  so 
long  as  such  surrender  value  will  purchase  nonparticipating  tempo- 
rary insurance  at  net  single  premium  rates  by  the  standard  adopted 
by  the  company,  at  the  age  of  the  insured  at  the  time  of  lapse  or 
forfeiture,  provided  in  case  of  any  endowment  policy  if  the  sum 


SUKKENDER  VALUES  AND  POLICY  LOANS     233 

values  earlier  at  their  option.  Canada,  on  the  other  hand,  re- 
quires policies  to  be  non-forfeiting  after  three  years  and  does 
not  allow  the  issue  of  policies  guaranteeing  surrender  values 
until  three  years'  premiums  have  been  paid.  The  laws  of  every 
state  base  the  surrender  value  upon  the  reserve,  either  by  a 
specified  standard  or  by  the  standard  upon  which  the  policy  is 
issued,  and  all  allow  a  surrender  charge  —  that  is  to  say,  a  de- 
duction is  allowed  to  be  made  from  the  reserve  and  the  balance 
is  the  cash  value  which  may  either  be  received  in  cash  or  used 
to  purchase  paid-up  or  temporary  insurance.  The  surrender 
charge  allowed  under  most  state  laws  is  2Vfc  per  cent,  of  the 
amount  insured.  In  one  state  it  is  3  per  cent,  of  the  insur- 
ance. Sometimes  it  is  20  per  cent,  of  the  reserve;  and  in 
Massachusetts  it  is  "  5  per  cent,  of  the  present  value  of  the 
future  net  premiums  which  by  its  terms  the  policy  is  exposed 
to  pay  in  case  of  its  continuance."  3 

Liberality  of  Companies  in  the  Granting  of  Surrender 
Values.—  While  the  foregoing  non-forfeiture  laws  define  the 

applicable  to  the  purchase  of  temporary  insurance  shall  be  more 
than  sufficient  to  continue  the  insurance  to  the  end  of  the  endow- 
ment term  named  in  the  policy,  the  excess  shall  be  used  to  purchase 
in  the  same  manner  pure  endowment  insurance  payable  at  the  end 
of  the  endowment  term  named  in  the  policy  on  the  conditions  on 
which  the  original  policy  was  issued,  and  provided  further  that  any 
attempted  waiver  of  the  provisions  of  this  paragraph  in  any  appli- 
cation, policy  or  otherwise,  shall  be  void,  and  provided  further  that 
any  vp|i^e  Allowed  in  lieu  thereof  shall  be  at  least  equal  to  the  net 
value  of  ttie  temporary  insurance  or  of  the  temporary  and  pure 
endowment  insurance  herein  provided  for.  The  term  of  temporary 
insurance  herein  provided  for  shall  include  the  period  of  grace,  if 
any.  In  every  case  where  a  contract  provides  for  both  insurance 
and  annuities,  the  foregoing  provisions  shall  apply  only  to  that  part 
of  the  contract  which  provides  for  insurance,  but  every  such  con- 
tract containing  a  provision  for  a  deferred  annuity  on  the  life  of 
the  insured  only  (unless  paid  for  by  a  single  premium)  shall  pro- 
vide that  in  the  event  of  the  nonpayment  of  any  premium  after 
three  full  years'  premiums  shall  have  been  paid,  the  annuity  shall 
automatically  become  converted  into  a  paid-up  annuity  for  such  a 
proportion  of  the  original  annuity  as  the  number  of  completed 
years'  premiums  paid  bears  to  the  total  number  of  premiums  re- 
quired under  the  contract." 

3HUDNUT,   JAMES  M.,   Studies  in  Practical  Life   Insurance.   20. 
New  York,  1911, 


234          THE  PRINCIPLES  OF  LIFE  INSURANCE 

amount  that  must  be  returned  upon  the  surrender  of  a  policy, 
it  should  be  noted  that  many  of  the  companies  grant  surrender 
values  greater  than  those  required  by  statute.  The  chief 
factor  in  bringing  about  this  situation  was  competition  be- 
tween the  companies.  :i  Tl^tf  agents  of  the  various  companies, 
in  the  heat  of  competition/'  as  explained  by  Mr.  William 
Alexander,  "have  stimulated  the  public  to  demand  large 
surrender  values,  and  the  companies  are  vying  with  one  an- 
other in  the  liberality  of  their  offers."  4  In  fact,  some  com- 
panies allow  cash  values  equal  to  the  full  reserve  at  the  end  of 
the  second  or  third  year,  although  the  loading  on  the  premium 
is  only  for  the  usual  amount.  With  the  great  majority  of  com- 
panies, however,  the  non-forfeiture  provisions  of  the  policy 
become  operative  only  after  the  payment  of  premiums  for  two 
or  three  years,  and  then  provide  for  a  surrender  charge  which 
is  greater  during  the  early  years  of  the  policy  and  which  di- 
minishes year  by  year  until  the  tenth,  fifteenth  or  twentieth 
policy  year,  the  surrender  value  thereafter  being  equal  to  the 
full  reserve  on  the  policy. 

Reasons  Justifying  a  Surrender  Charge. —  Three  promi- 
nent reasons  have  been  advanced  why  the  company  during 
the  earlier  years  of  the  policy  should  make  the  surrender  al- 
lowance less  than  the  full  reserve.  The  most  important  of 
these  relates  to  the  initial  expense  incurred  by  the  company 
in  securing  and  issuing  a  policy.  This  expense  fo-ity  con- 
siderably exceeds  the  amount  allowed  for  expenses  in  the  first 
year's  premium,  and  the  company  expects  to  reimburse  itself 
out  of  the  margin  for  expenses  in  the  future  premiums  which 
the  insured  is  expected  to  pay  in  accordance  with  the  terms  of 
his  contract.  Unless  the  policy  therefore  remains  in  force 
for  several  years  it  will  actually  prove  a  source  of  expense,  in- 
stead of  advantage,  to  the  company.  To  allow  the  return  of 
the  full  reserve  to  a  policyholder  who  lapses  or  surrenders  his 
policy  in  the  early  years  would  be  an  injustice  to  remaining 
policyholders  since  they  would  be  obliged  to  reimburse  the 

4  ALEXANDER,  WILLIAM,  The  Life  Insurance  Company,  214. 


SURRENDER  VALUES  AND  POLICY  LOANS      235 

company  for  the  amount  it  expended  in  securing  the  policy  in 
question  and  which  it  failed  to  get  from  the  insured  because 
of  his  early  withdrawal.  Justice  to  remaining  policyholders, 
it  is  argued,  requires  the  application  of  some  form  of  penalty 
for  early  withdrawal,  and  this  penalty  we  have  seen  assumes 
the  form  of  a  complete  forfeiture  of  the  reserve  in  case  of 
lapse  or  surrender  before  the  payment  of  the  first  two  or  three 
premiums,  and  as  regards  the  great  majority  of  companies, 
the  retention,  following  the  payment  of  the  second  or  third 
premium,  of  a  decreasing  surrender  charge  during  the  next 
ten,  fifteen  or  twenty  policy  years.  Obviously,  as  the  policy 
grows  older  more  liberal  surrender  values  may  be  granted. 
Not  only  has  the  company  had  time  to  reimburse  itself  for  the 
original  cost  of  obtaining  the  policy,  but  the  contract  is  now 
self-supporting.  Furthermore,  the  policyholder  has  become 
sufficiently  accustomed  to  paying  his  premiums  to  warrant  the 
belief  that  he  will  continue  the  policy  to  its  maturity.  It 
should  here  be  stated  that  by  far  the  greatest  number  of  lapses 
and  surrenders  take  place  during  the  first  and  second  policy 
years.  •• 

Another  reason  advanced  in  favor  of  not  allowing  the  in- 
sured to  obtain  the  full  reserve  on  the  policy  at  pleasure  is 
the  possibility  that  during  periods  of  financial  stringency  or 
business  depression  so  many  policyholders  may  avail  them- 
selves of  the  privilege  of  surrendering  their  policies  as  to 
greatly  weaken  the  financial  standing  of  the  company  to  the 
detriment  of  remaining  policyholders.  In  commenting  on 
this  phase  of  the  subject,  Mr.  Edward  B.  Fackler  states : 

In  times  of  business  depression,  such  as  this  country  has 
seen  more  than  once,  even  the  best  securities  will  suffer  serious 
depreciation  though  their  certainty  of  payment  remains  un- 
questioned. Such  a  financial  crisis  is  just  the  time  when  pol- 
icyholders, in  need  of  cash,  are  most  likely  to  demand  sur- 
render values  from  the  company,  thus  not  only  reducing  its 
premium  income,  but  also  forcing  the  sale  of  securities  at  less 
than  their  true  value,  and  perhaps  crippling  the  company.  In 
such  a  case  the  persons  exercising  these  options  should  pur- 


236       THE  PRINCIPLES  OF  LIFE  INSURANCE 

posely  not  be  allowed  a  greater  proportion  of  the  reserves  on 
their  policies  than  the  company  is  able  to  realize  on  the  true 
value  of  its  securities  sold  to  provide  cash  for  retiring  policy- 
holders.  This  matter,  however,  cannot  be  regulated  by  any 
set  of  rules,  but  depends  on  the  amount  of  the  company's  as- 
sets, the  character  of  its  business  and  investments,  and  the 
form  of  its  organization.5 

Such  statements  have  in  view  the  fact  that,  unlike  the  re- 
strictions imposed  by  savings  banks  on  the  withdrawal  of 
deposits,  most  life-insurance  policies  now  outstanding  do  not 
provide  for  the  right  on  the  part  of  the  company  to  defer 
payment  in  time  of  financial  stringency.  Within  recent  years, 
however,  many  companies  have  reserved  the  right  in  their 
contracts  to  defer  payment  of  the  cash  value,  or  the  making 
of  a  loan  except  for  the  purpose  of  paying  renewal  premiums, 
for  a  period  not  exceeding  sixty  or  ninety  days. 

Still  another  argument  in  favor  of  a  surrender  charge,  al- 
though some  writers  question  its  correctness  or  importance, 
refers  to  the  "adverse  mortality  selection"  which  it  is  as- 
sumed will  be  brought  about  by  the  allowance  of  very  liberal 
surrender  values.  The  position  taken  by  the  supporters  of 
this  view  is  as  follows :  A  life-insurance  policy  is  a  unilateral 
contract  to  which  the  company  must  always  adhere  but  which 
the  insured  may  break  at  any  time  by  simply  discontinuing 
his  premium  payments.  Whenever,  therefore,  the  payment 
of  premiums  seems  a  hardship,  the  healthy  policyholder,  not 
feeling  the  immediate  need  for  insurance,  will  have  no  hesi- 
tancy in  lapsing  his  policy.  Policyholders  in  poor  health,  on 
the  contrary,  will  appreciate  fully  the  value  of  their  insurance 
and  will  exert  themselves  to  the  utmost  to  pay  the  premium. 
Hence,  according  to  this  view,  the  good  risks  are  likely  to  lapse 
on  a  large  scale  if  surrender  values  are  liberal,  while  impaired 
risks  will  stay  with  the  company.  The  result  is  a  great  re- 
duction in  the  average  vitality  of  the  policyholders  remain- 
ing with  the  company.  It  is  therefore  argued  that  retiring 
policyholders  should  forfeit  a  portion  of  the  reserve  value  of 

,  EDWARD  B.,  Notes  on  Life  Insurance,  97-98, 


SUKKENDEK  VALUES  AND  POLICY  LOANS      237 

their  policies  in  order  to  provide  a  fund  to  meet  the  higher 
<leath  rate  among  the  poorer  risks  that  remain. 

Various  Optional  Forms  in  Which  Surrender  Values 
Are  Granted. —  Life-insurance  policies  almost  invariably  give 
the  insured  the  option  of  taking  the  surrender  value  guaran- 
teed to  him  in  his  contract  in  one  of  three  forms.  The  val- 
ues under  each  form,  and  the  conditions  under  which  they  are 
granted,  are  stated  fully  in  the  contract.  Moreover,  the  val- 
ues allowed  under  the  several  options  are  usually  equivalent 
to  one  another  as  measured  by  some  standard.  Briefly  out- 
lined, the  options  referred  to  are  the  following : 

1.  Settlement  by  receiving  cash  payment. —  Upon  re- 
quest, accompanied  by  a  full  surrender  of  the  policy,  the  com- 
pany will  pay  the  then  cash  surrender  value  thereof,  less  any 
indebtedness  to  the  company.     By  accepting  this  option  the 
insured  terminates  all  connection  with  the  company  as  regards 
the  policy  in  question. 

2.  Settlement  by  accepting  paid-up  extended  term  in- 
surance.—  Under  this  option  the  face  amount  of  the  policy 
and  any  existing  dividend  additions,  less  any  indebtedness  to 
the  company  on  account  of  the  policy,  will  be  extended  as 
paid-up  term  insurance  for  such  length  of  time  from  the  date 
of  default  in  the  premium  payment  as  the  then  surrender 
value  will  provide  at  the  net  single  premium  rate  for  the  at- 
tained age  of  the  insured  according  to  a  certain  mortality 
table  with  interest  at  a  stipulated  rate.     It  is  usually  this 
value  which  is  extended  automatically  upon  the  failure  to  pay 
a  premium;  while  the  other  options  are  usually  granted  only 
upon  request.     At  the  expiration  of  the  term,  the  policy,  like 
any  other  ordinary  term  contract,  will  have  no  further  value. 

3.  Settlement  by  accepting  paid-up  fractional  insur- 
ance of  the  same  kind  as  the  original  policy. —  Under  this  op- 
tion such  an  amount  of  the  original  policy  will  be  continued 
as  paid-up  insurance  as  the  cash  surrender  value  will  provide 
at  the  net  single  premium  rate  for  the  attained  age  of  the  in- 
sured according  to  a  given  mortality  table  and  an  assumed 
rate  of  interest. 


238        THE  PRINCIPLES  OF  LIFE  INSURANCE 

In  addition  to  the  above  customary  options  there  are  occa- 
sional instances  where  the  policy  offers  the  privilege  of  using 
the  surrender  value  for  the  purchase  of  a  life  annuity,  a  tem- 
porary life  annuity,  or  a  temporary  annuity  certain.  Many 
policies  also  provide  that  upon  the  request  of  the  insured,  made 
prior  to  default  in  premium  payment,  the  premium  or  pre- 
miums thereafter  falling  due  during  the  time  such  request 
shall  remain  unrevoked,  will  be  advanced  as  a  loan  against 
the  policy  at  a  stipulated  rate  of  interest,  provided  the  then 
cash  surrender  value  shall  be  sufficient  to  cover  the  loan. 
Under  this  plan  any  premium  loan  may  be  repaid  at  any  time. 

POLICY  LOANS 

Development  of  Such  Loans. —  The  so-called  "  premium- 
note  "  plan  constituted  the  first  important  form  of  loan  which 
participating  companies  made  upon  the  security  of  a  life- 
insurance  policy.  According  to  this  plan,  used  quite  gener- 
ally as  far  back  as  1845,  the  company  required  the  insured  to 
pay  only  one-third  or  one-half  of  the  premium  in  cash,  and 
accepted  his  note  for  the  balance.  The  notes,  which  bore  in- 
terest, were  considered  a  lien  against  the  policy,  and  it  was 
expected  that  the  annual  dividends  upon  the  policy  would 
prove  sufficient  to  extinguish  both  interest  and  principal  of 
the  notes  at  the  end  of  a  certain  time.  Although  issued  usu- 
ally in  the  form  of  a  personal  obligation,  attempts  were  rarely 
made  to  enforce  payment  of  the  notes,  the  same  being  consid- 
ered as  cancelled  when  the  policy  became  void  upon  the  in- 
sured's  failure  to  pay  a  premium.  For  all  practical  purposes, 
therefore,  this  plan  was  equivalent  to  granting  a  surrender 
value,  because  the  sole  security  back  of  the  loan  was  the  re- 
serve value  of  the  policy.  The  dividends  actually  realized, 
however,  failed  to  take  care  of  the  notes  as  expected  with  the 
result  that,  since  the  notes  were  deducted  from  the  face  of 
the  policy  at  death  and  the  interest  on  the  indebtedness  was 
added  to  the  cash  part  of  the  premium,  the  insured  was  really 
carrying  decreasing  insurance  at  an  increasing  cost.  As  a 
consequence  much  dissatisfaction  resulted  among  policyhold- 


SURRENDER  VALUES  AND  POLICY  LOANS      239 

crs.  and  the  entire  plan  was  generally  abandoned  during  the 
decade  following  1870. 

Although  some  companies  granted  individual  loans  to  pol- 
icyholders  during  the  period  just  referred  to  by  accepting  an 
assignment  of  the  policy  as  collateral,  this  practice  did  not 
become  general  until  after  1890.  In  1884  one  of  the  leading 
American  companies  issued  a  contract  in  which  it  guaranteed 
loan  values  up  to  50  per  cent,  of  the  reserve.  At  first,  also, 
a  considerable  number  of  companies  sought  to  limit  their  pol- 
icy loans  to  such  advances  as  would  enable  the  insured  to  pay 
his  premiums.  But  this  plan  proved  unsatisfactory,  partly 
because  of  the  public's  demand  for  larger  loans  to  meet  per- 
sonal as  well  as  business  requirements  and  partly  because  of 
the  willingness  of  many  companies,  in  the  race  for  business,, 
to  meet  the  desire  of  the  public  in  the  matter.  Following 
1890  the  loan  privilege  manifested  the  same  rapid  develop- 
ment towards  liberality  on  the  part  of  the  companies  that  was 
noted  in  connection  with  the  granting  of  surrender  values. 
"  Companies,  in  their  struggle  for  size  and  in  their  desire  to 
issue  policies  that  could  be  readily  sold  by  the  agents,"  to 
quote  Mr.  A.  E.  Childs,  "  became  more  and  more  liberal  in 
their  offers,  and  even  went  so  far  as  to  instruct  their  agents 
to  use  these  liberal  policy  conditions  as  the  principal  talking- 
points  in  their  efforts  to  sell  insurance."  6 

Nature  of  Policy  Loans  as  Now  Granted. — Although  the 
loan  privilege  is  granted  to-day  by  all  companies,  a  consider- 
able variance  exists  as  regards  the  size  of  the  loan.  Some 
companies  limit  the  loan  at  all  times  to  a  stated  percentage  of 
the  reserve,  while  others  lend  the  full  terminal  reserve 
less  the  interest  on  the  loan.  Still  other  companies  lend  the 
full  terminal  reserve  of  the  policy  at  the  end  of  the  next  year 
less  interest  in  advance  and  the  premiums  payable  before  the 
expiration  of  the  next  policy  year.  Nearly  all  policies  also 
make  provision,  as  already  indicated,  for  the  advancement  to 

8 GUILDS,  A.  E.,  "The  Ultimate  Effect  of  an  Unrestricted  Right 
to  Borrow  on  Life  Insurance  Policies,"  Proceedings  of  the  Seventh 
Annual  Meeting  of  Life  Insurance  Presidents. 


240       THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  insured,  upon  request,  of  any  premium  or  premiums  fall- 
ing due,  provided  the  cash  surrender  value  is  sufficient  to 
cover  such  loans.  If  the  cash  value  allowed  under  the  policy 
is  less  than,  the  reserve,  such  value  is  almost  invariably  made 
the  basis  of  the  loan,  the  insured  being  allowed  to  borrow  all 
or  a  designated  percentage  thereof.  Under  such  conditions 
the  policy  provision  guaranteeing  the  loan  usually  reads  to 
the  following  effect : 

Upon  request  and  the  sole  security  of  this  policy  properly 
assigned,  the  company,  unless  extended  term  insurance  be  in 
force,  will  advance  at  a  rate  of  interest  not  exceeding  6  per 
cent,  per  annum,  an  amount  which  with  the  interest,  and  any 
unpaid  premium  or  premiums,  for  the  then  current  policy  year 
shall  equal,  or  at  the  option  of  the  insured  be  less  than,  the 
cash  value  of  the  policy  and  of  any  existing  dividend  additions 
at  the  end  of  such  year.  Failure  to  pay  either  loan  or  interest 
shall  not  avoid  the  policy  unless  the  total  indebtedness  to  the 
company  on  account  thereof  shall  equal  or  exceed  the  cash  sur- 
render value  of  the  policy  and  any  existing  dividend  additions, 
nor  until  thirty-one  days  after  notice  shall  have  been  mailed  to 
the  last  known  address  of  the  insured  and  of  any  assignee. 

Advantages  Resulting  from  the  Loan  Privilege. —  While 
the  granting  of  a  policy  loan  is  frequently  the  equivalent  of 
giving  to  the  insured  the  surrender  value  of  his  policy,  there 
is  nevertheless  a  vital  difference  between  the  underlying 
purposes  of  the  two.  Policy  loans  were  originally  granted 
by  many  of  the  leading  companies  with  a  view  to  enabling 
the  insured  to  obtain  the  necessary  funds  in  time  of  financial 
need  to  pay  his  premiums,  and  thus  avoid  the  necessity  of 
surrendering  his  policy  for  its  cash  value.  In  this  connection, 
reference  may  again  be  made  to  those  provisions  in  modern 
policies  which  allow,  either  automatically  or  upon  the  re- 
quest of  the  insured,  for  the  advancing  of  premiums  as  a 
loan  against  the  policy  as  long  as  the  surrender  value  is 
sufficiently  large  to  protect  the  advances.  In  fact,  some 
of  the  largest  companies  first  adopted  the  loan  feature  in 
their  contracts  during  periods  of  crises,  such  as  in  1893, 


SUKKENDEK  VALUES  AND  POLICY  LOANS      241 

with  the  result  .that  much  of  their  insurance  in  force  was 
maintained  by  thus  temporarily  assisting  their  policyholders. 

Not  to  grant  loans  in  times  of  financial  distress,  and  at  the 
same  time  offer  cash  surrender  values,  may  cause  the  surren- 
der of  many  policies  in  order  to  realize  much  needed  cash. 
For  many  persons,  therefore,  the  policy  loan  is  the  means  not 
only  of  preventing  the  loss  of  their  insurance  but  also  of 
temporarily  protecting  the  family  from  want.  Furthermore, 
the  loan  privilege  has  frequently  served  a  very  useful  purpose 
in  enabling  business  men  to  realize  additional  cash  at  a  time, 
especially  in  the  midst  of  a  panic,  when  it  is  impossible  for 
bankers  to  meet  their  requirements.  It  is  at  such  times,  as  we 
have  seen,  that  the  loan  value  of  life-insurance  policies  is  a  real 
asset  which  enhances  the  credit  of  the  business  man  because 
it  is  available  on  demand,  irrespective  of  the  conditions  which 
may  prevail,  and  usually  at  the  fixed  rate  of  5  or  6  per  cent.7 
In  fact,  the  extent  to  which  policy  loans  were  obtained  during 
the  panic  of  1907  demonstrated  their  usefulness  as  a  means  of 
helping  in  time  of  need  to  such  an  extent  as  to  raise  promi- 
nently the  question  whether  it  is  not  advisable  for  life- 
insurance  companies  to  follow  the  practice  of  savings  banks 
in  protecting  themselves  against  a  possible  run  at  a  time 
when  interest  rates  are  excessive  and  when  it  is  impossible, 
except  at  a  great  sacrifice  in  values,  to  realize  upon  their  se- 
curities. It  is  for  this  reason  that  many  companies  have  in 
recent  years  reserved  the  right  to  defer  the  making  of  policy 
loans,  except  for  the  purpose  of  paying  renewal  premiums,  for 
a  period  of  from  sixty  to  ninety  days. 

Extent  of  Policy  Loans  and  the  Relation  of  Such  Loans 
to  Lapses  and  Surrenders. —  While  the  loan  privilege  fre- 
quently serves  as  a  means  of  maintaining  policies  which  would 
otherwise  be  surrendered,  or  at  times  fulfils  a  real  business 
need,  it  is  also  true  that  the  privilege  is  grossly  abused  by 
many  for  purposes  that  should  never  be  allowed  to  endanger 
the  protection  which  it  is  the  function  of  life  insurance  to  af- 

7  See  pages  40  to  42  of  this  volume. 


242          THE  PRINCIPLES  OF  LIFE  INSURANCE 

ford.  Owing  largely  to  the  emphasis  placed  by  companies 
and  their  agents  upon  liberal  loan  values  as  an  inducement  to 
sell  insurance,  a  large  element  in  the  insuring  public  has  come 
to  regard  the  value  of  policies  as  little  more  than  an  accumu- 
lation of  deposits  to  be  obtained  by  way  of  surrender  or  a 
loan  upon  the  slightest  provocation.  With  many,  borrowing 
<on  policies  has  become  a  habit.  This  conclusion  seems  war- 
ranted by  a  consideration  of  the  enormous  increase  of  such 
loans  in  recent  years.  Whereas  the  percentage  of  policy  loans 
and  premium  notes  amounted  to  3.32  per  cent,  of  the  total 
reserves  of  the  various  companies  reported  in  the  Insurance 
Year  Book  for  the  year  1888,  that  percentage  has  increased  to 
16.9  per  cent,  during  the  year  1913.  At  present  policy  loans 
for  260  companies  aggregate  $657,994,947  as  compared  with 
a  total  reserve  value  of  policies  in  these  companies  of  $3,903,- 
615,175.  Between  1903-1913  the  policy  loans  of  these  com- 
panies increased  313  per  cent,  as  compared  with  an  increase 
of  only  106  per  cent,  in  total  admitted  assets  and  73  per  cent. 
in  total  insurance  in  force,  i.e.  policy  loans  increased  nearly 
three  times  as  fast  as  assets  and  about  four  and  one-half  times 
as  fast  as  the  volume  of  insurance.  During  the  last  four  years 
of  this  decade  the  increase  in  such  loans  amounted  to  approxi- 
mately $212,000,000,  or  over  20  per  cent,  of  the  increase  in 
admitted  assets  and  nearly  31.4  per  cent,  of  the  increase  in  the 
reserve  value  of  policies  during  the  same  four  years. 

This  alarming  increase  in  the  volume  of  policy  loans  fur- 
nishes ample  evidence  of  the  careless  manner  in  which  many 
mortgage  the  monetary  value  of  their  policies  for  purposes  of 
speculation  or  needless  expenditures.  To  again  quote  Mr.  A. 
E.  Childs :  "  The  very  people  who  are  living  up  to  and  even 
beyond  their  incomes,  depending  upon  their  insurance  for 
the  future  protection  of  their  families,  are  the  very  people 
who  are  mortgaging  their  insurance  just  as  soon  as  the  depos- 
its are  large  enough  to  satisfy  some  of  their  more  expen- 
sive desires.  They  either  forget  the  original  purpose  for 
which  they  took  the  insurance  or  they  allow  their  selfish  de- 
sires for  temporary  enjoynient  to  outweigh  their  appreciation 


SURRENDER  VALUES  AND  POLICY  LOANS      243 

of  the  necessity  for  providing  for  the  future."  8  Too  fre- 
quently policyholders  effect  loans  on  their  policies  simply  be- 
cause they  are  so  easily  obtained,  never  appreciating  at  the 
time  the  vital  relation  of  life  insurance  to  the  beneficiary  and 
often  neglecting  some  other  available  asset  which  should  have 
been  selected  in  preference  to  the  cash  value  of  the  policy.  It 
should  again  be  stated  that  the  fundamental  purpose  of  life 
insurance  is  protection  to  the  family.  When  once  acquired, 
therefore,  it  is  essential  that  life  insurance  be  conserved, 
and  in  this  connection  it  is  highly  important  to  bear  in 
mind  that  the  great  majority  of  such  loans  are  never  repaid 
and  that  the  policy  lapses  upon  failure  to  make  such  repay- 
ment. As  previously  stated,  "  Life  insurance  should  be  re- 
garded as  a  sacred  possession  to  be  mortgaged  only  in  case  of 
extreme  necessity.  Borrowing  on  the  policy  depreciates  its 
value  and  defeats  the  original  purpose  it  was  intended  to 
serve.  If  not  actually  necessary,  borrowing  on  a  policy  is  an 
act  of  flagrant  injustice  to  the  beneficiary." 

Much  has  been  written  of  late  to  stem  the  tide  against  in- 
creasing policy  loans,  and  many  companies  have  attempted 
in  recent  years  to  check  the  abuse  by  raising  the  interest  rate 
from  5  to  6  per  cent,  and  by  reserving  the  right  to  defer  such 
loans  for  sixty  or  ninety  days.  The  difficulty  involved,  how- 
ever, is  a  deeper  one,  namely,  the  failure  on  the  part  of  the 
insuring  public  to  understand  the  fundamental  purpose  of  life 
insurance.  It  is  therefore  highly  essential  to  impress  upon 
the  insured  as  well  as  the  beneficiary  the  necessity  of  not 
allowing  unnecessary  loans  to  defeat  the  sacred  purpose  of  life 
irisurance  in  protecting  the  home  or  in  providing  for  old  age. 
If  women  —  the  beneficiaries  in  the  great  majority  of  in- 
stances —  understood  that  a  policy  loan  usually  means  a  lapse, 
that  replacement  becomes  possible  only  upon  a  satisfactory 
medical  examination,  and  that  in  any  case  the  loan  for  the 
time  being  impairs  the  amount  of  protection,  and  if  they 

8CHiLDS,  A.  E.,  "The  Ultimate  Effect  of  an  Unrestricted  Right 
to  Borrow  on  Life  Insurance  Policies,"  Proceedings  of  the  Seventh 
Annual  Meeting  of  Association  of  Life  Insurance  Presidents,  29. 


244       THE  PRINCIPLES  OF  LIFE  INSURANCE 

were  shown  their  right  to  keep  themselves  posted  as  to  what 
the  insured  is  doing  with  his  policies,  there  is  reason  to  believe 
that  the  number  of  policy  loans  would  be  greatly  reduced 
and  limited  in  the  main  to  cases  clearly  justifiable.  In  this 
connection,  also,  the  agent  who  originally  negotiated  the  con- 
tract could,  if  again  placed  in  touch  with  his  client  at  the 
time  a  loan  is  contemplated,  render  a  distinct  service  by 
forcibly  emphasizing  to  him  the  reasons  against  needless  pol- 
icy loans.  Such  efforts  are  apt  to  prevail,  especially  if  the 
agent  renders  the  further  service  of  helping  to  suggest  the  use 
of  some  other  assets  which  the  insured  may  possibly  have 
available  to  meet  his  pressing  financial  needs. 

BIBLIOGRAPHY 

ALEXANDER,  WILLIAM,  The  Insurance  Company,  chap.  7,  208- 
214,  on  "  Large  vs.  Small  Surrender  Values,"  New  York, 
1905. 

CHILDS,  ARTHUR  E.,  address  on  "Ultimate  Effect  of  an  Unre- 
stricted Right  to  Borrow  on  Life  Insurance  Policies." 
Proceedings  of  the  Seventh  Annual  Meeting  of  the  As- 
sociation of  Life  Insurance  Presidents. 

CLARK,  J.  R.,  "Policy  Loans."  Proceedings  of  the  Fifth  An- 
nual Meeting  of  the  Association  of  Life  Insurance  Presi- 
dents. 

DAWSON,  MILES  M.,  Elements  of  Life  Insurance,  chaps,  on 
"  Surrender  Values"  and  "Loans  on  Policies,"  New  York. 
1911. 

FACKLER,  EDWARD  B.,  Notes  on  Life  Insurance,  96-99.  New 
York,  1907. 

HUDNUT,  JAMES  M.,  Studies  in  Practical  Life  Insurance, 
19-23.  New  York,  1911. 

Mom,  HENRY,  Life  Assurance  Primer,  chap.  7,  130-134,  on 
"  Settlements  and  Surplus." 

Report  of  the  Joint  Committee  of  the  Senate  and  Assembly  of 
Wisconsin  on  the  Affairs  of  Life  Insurance  Companies, 
134^142.  Madison,  1907. 


CHAPTER  XIX 
SURPLUS 

Meaning  of  Surplus  and  Sources  from  Which  Derived. 

—  Life-insurance  policies  may  be  classified  either  as  "non- 
participating"  or  "participating/'  Non-participating  poli- 
cies are  those  which  definitely  guarantee  the  premium  and  the 
sum  insured  and  do  not  entitle  the  insured  to  receive  any 
other  benefits  than  those  expressly  set  forth  in  the  contract. 
Participating  policies,  on  the  contrary,  usually  require  the 
payment  of  a  premium  considerably  larger  than  necessary  to 
meet  the  company's  liability  under  the  contract,  and  as  a  con- 
sequence the  insured  is  allowed  from  time  to  time  to  "  partici- 
pate," i.e.  to  receive  a  portion  of  the  surplus  earnings  of  the 
company.  This  surplus  may  be  defined  as  that  sum  which 
the  company  has  on  hand  after  deducting  the  reserve  value  of 
its  policies  and  after  paying  its  current  expenses  and  annual 
death  claims. 

To  understand  the  sources  from  which  a  company  derives 
its  surplus,  it  is  necessary  to  recall  the  nature  of  life-insur- 
ance premiums.  Net  premiums,  we  saw,  are  calculated  on  the 
assumption  that  a  certain  rate  of  interest  can  be  earned  and  that 
death  claims  will  occur  as  indicated  by  a  given  mortality  table. 
If,  therefore,  the  rate  of  interest  actually  earned  and  the  mor- 
tality actually  experienced  are  just  equal  to  the  assumptions, 
and  if  all  policies  remain  in  force  until  maturity,  net  pre- 
miums will  prove  just  sufficient  to  enable  a  company  to  meet 
the  benefits  guaranteed  under  its  contracts.  But  to  the  net 
premiums  the  companies  must  add  a  loading  to  cover  expenses 
and  contingencies.  It  is  thus  clear  that  in  the  regular  con- 
duct of  its  business  a  life-insurance  company  might  derive  a 
surplus  from  three  principal  sources:  (1)  a  higher  return  on 
investments  than  the  rate  assumed  for  premium  and  reserve 

245 


246          THE  PRINCIPLES  OF  LIFE  INSURANCE 

computations,  (2)  a  lower  death  rate  than  that  indicated  by 
the  mortality  table  employed,  and  (3)  a  saving  in  the  loading 
because  total  expenses  are  less  than  the  total  loadings.  Al- 
though the  sums  derived  from  all  three  sources  are  usually 
called  surplus  earnings,  it  should  be  noted  that  the  last  two 
are  really  in  the  nature  of  a  salvage  and  that  only  the  first  — 
interest  earnings  on  investments  in  excess  of  the  assumed  rate 
—  may  be  truly  characterized  as  a  profit.  A  few  minor 
sources  of  surplus,  such  as  gains  from  the  surrender  or  lapse 
of  policies  and  from  non-participating  business,  should  also 
be  mentioned,  but  these  sources  are  usually  of  much  less  im- 
portance than  the  other  three. 

Gain  from  Investment  Earnings. —  Since  life-insurance 
policies  are  written  for  a  long  term  of  years  it  is  essential 
that  the  companies  assume  a  rate  of  interest  for  their  net 
premium  and  reserve  computations  so  conservative  as  to 
preclude  any  likelihood  of  failure  to  realize  the  same  at  any 
time  throughout  the  life  of  the  contract.  At  present  the  as- 
sumed rate  is  usually  3  or  3%  per  cent.,  although  many  of  the 
old  policies  still  in  force  were  issued  on  the  assumption  that 
a  4  per  cent,  rate  would  be  realized  on  investments.  If  a  com- 
pany has  based  its  net  premiums  and  reserves  on  the  assump- 
tion that  it  will  earn  3  per  cent,  but  actually  earns  4  or  4^2 
per  cent.,  as  is  now  generally  the  case,  that  1  or  1^  per  cent, 
(minus  the  expenses  connected  with  the  making  and  main- 
tenance of  investments)  represents  the  excess  of  investment 
earnings  over  and  above  the  return  necessary  to  the  solvency 
of  the  company,  and  may,  if  considered  advisable,  be  returned 
to  the  policyholders  who  contributed  the  same.  Frequently 
a  company  may  gain  large  profits  from  appreciation  in  the 
value  of  its  investments,  and  this  item  is  usually  included 
under  the  general  heading  of  interest  earnings. 

Saving  from  Mortality. —  This  saving  arises  from  the 
fact  that  life-insurance  companies  in  the  United  States  do  not 
experience  on  the  average  as  heavy  mortality  as  is  indicated 
by  the  mortality  table  employed  and  which  has  therefore  been 
provided  for  in  the  premiums.  At  the  end  of  any  given  year 


SURPLUS  247 

the  saving  in  mortality  represents  the  difference  between  the 
face  value  of  the  policies  to  be  paid  according  to  the  mortality 
table  used  and  the  face  value  of  the  policies  actually  paid 
minus  the  reserve  on  the  policies  thus  not  paid.  The  reserve, 
it  will  be  recalled,  was  defined  as  that  sum  which,  together  with 
future  premiums,  will  enable  the  company  to  pay  future  death 
claims.  In  calling  saving  from  mortality  a  surplus  it  is  as- 
sumed, as  Mr.  Miles  M.  Dawson  well  explains,  that  "  the  lives 
which  complete  the  year,  no  matter  if  there  have  been  fewer 
losses  than  as  per  the  table  during  the  year,  have  as  good  vital- 
ity and  as  good  chances  of  life  as  the  persons  at  their  attained 
ages,  from  whose  lives  the  experience  was  taken  which  made  up 
the  mortality  table.  Therefore,  their  future  premiums,  with 
their  present  reserves,  assure  the  payment  of  their  claims ;  and 
the  premiums  which  have  been  received  in  excess  of  the  needs 
of  the  past  and  of  the  reserve,  may  therefore  be  considered 
a  true  surplus/' *  Most  writers  in  discussing  this  source  of 
surplus  emphasize  the  importance  of  not  placing  too  much  re- 
liance on  the  showing  for  any  one  year  since  mortality  may 
fluctuate  from  year  to  year,  and  maintain  that  safety  requires 
the  finding  of  the  company's  experience  in  this  respect  for  a 
number  of  years.  It  is  therefore  asserted  that  it  is  unwise 
for  a  company  to  distribute  in  dividends  all  of  a  large  sav- 
ing from  mortality  in  one  year,  and  that,  if  it  is  not  desired 
to  decrease  dividends  in  later  years,  prudence  requires  the  re- 
tention of  a  portion  of  such  saving  to  balance  a  possible 
ismaller  saving  in  a  later  year. 

Saving*  from  Loading. —  Prudent  management  in  life  in- 
;surance  dictates  that  the  gross  premium  should  be  more  than 
sufficient  to  just  meet  normal  requirements  so  that  the  com- 
pany may  be  protected  against  exceptional  conditions.  In 
.fact,  one  of  the  avowed  purposes  in  loading  is  the  provision 
(of  a  definite  dividend  to  be  returned  to  the  policy  holder 
at  the  end  of  the  year  together  with  the  gains  from  other 
sources.  Competitive  conditions,  however,  especially  in  the 
matter  of  agents'  commissions,  brought  about  a  situation 

1  DAWSON,  MILES  M.,  Elements  of  Life  Insurance,  ed.  3d,  102-103. 


248       THE  PRINCIPLES  OF  LIFE  INSURANCE 

which  until  recently  meant  that  the  average  company  was 
just  about  able  to  keep  its  aggregate  expenses  within  the  ag- 
gregate loading  on  its  premiums.  Within  recent  years  there 
has  been  a  marked  tendency  towards  economical  management 
in  life  insurance  and  at  present  a  large  number  of  companies 
manage,  by  exercising  rigid  economy,  to  make  their  annual 
expenses  much  less  than  their  allowance  (the  loading  in  the 
gross  premium)  for  expenses  and  contingencies.  Hence  they 
are  able  to  credit  a  very  considerable  saving  to  surplus,  and 
this  saving  renders  the  twofold  purpose  of  protecting  the  com- 
pany against  financial  disturbances  and  of  furnishing  a  sub- 
stantial fund  out  of  which  to  pay  dividends. 

Gains  from  Forfeitures. —  The  great  majority  of  compa- 
nies, as  previously  explained,  retain  all  or  a  portion  of  the 
reserves  of  those  policies  which  are  surrendered  or  lapsed. 
The  sums  thus  retained  have  sometimes  been  regarded  as  con- 
stituting another  source  of  surplus,  although,  as  has  been  well 
said,  "it  seems  to  be  an  anomaly  that  any  business  should 
really  be  the  gainer  by  losing  custom/'  Owing  to  the  large 
surrender  values  prevailing  at  present,  however,  and  the  high 
expense  of  securing  new  business,  this  factor  can  scarcely  be 
regarded  as  yielding  a  profit ;  furthermore,  if  any  gain  should 
be  derived  from  this  source,  it  is  treated  usually  as  an  offset 
to  expenses. 

Two  reasons  have  been  advanced  to  show  that  the  so-called 
"  gain  from  forfeitures  "  is  only  an  apparent  and  not  a  real 
gain.  In  the  first  place  it  is  believed  that  where  illiberal  sur- 
render values  are.  allowed  the  apparent  gain  to  the  company 
is  offset  in  part  by  an  unfavorable  mortality  experience,  which 
is  attributed  to  the  adverse  selection  which  it  is  believed  will 
result  from  the  fact  that  healthy  policyholders  will  show  a 
greater  disposition  to  discontinue  illiberal  contracts  while 
those  who  are  failing  will  remain  in  the  company  irrespective 
of  the  harshness  of  policy  provisions.  But  of  much  greater 
importance,  it  is  argued,  is  the  expense  of  replacing  the  old 
risk  with  a  new  one.  ;  Not  only  did  the  company  incur  the 
heavy  initial  expense  of  securing  the  discontinued  policy  but 


SUKPLUS  249 

in  replacing  it  with  a  new  policy  it  incurred  this  initial  ex- 
pense a  second  time,  i.e.  it  is  obliged  to  make  two  subtractions 
from  its  insurance  fund  in  order  to  secure  one  policyholder. 
Moreover,  certain  investigations  also  show  that  companies  with 
a  reputation  for  liberal  surrender  values  not  only  secure  busi- 
ness at  lower  rates  of  commission  than  those  paid  by  com- 
panies pursuing  a  different  course,  but  also  pay  the  highest 
dividends  to  policyholders. 

Methods  of  Apportioning  the  Surplus. —  Having  out- 
lined the  sources  from  which  the  surplus  is  derived  we  may 
next  pass  to  its  apportionment  among  policyholders.  The 
plan  now  generally  used  in  the  United  States  is  known  as  the 
"  contribution  plan,"  or  some  modified  form  of  that  system. 
As  its  name  implies,  this  plan  aims  to  credit  to  each  policy 
that  proportion  of  the  company's  total  surplus  which  the  pol- 
icy in  question  has  "contributed."  According  to  the  plan 
"  the  surplus  is  rebated  back  to  the  insured  precisely  as  it  is 
considered  that  his  policy  has  contributed  it.  Thus  if  the 
mortality  has  not  been  so  high  as  was  assumed,  there  is  put 
into  his  dividend  the  proportionate  saving  on  his  own  tabular 
cost  of  insurance.  In  like  manner,  if  the  expenses  and  con- 
tingencies have  not  absorbed  all  the  aggregate  loading  on  the 
premiums,  there  is  given  him  in  his  dividend  the  proportion- 
ate part  of  his  loading  that  has  not  been  required  for  expenses 
and  contingencies.  If  the  average  interest  returns  upon  the 
mean  assets  have  exceeded  the  rate  assumed,  he  receives  in  his 
dividend  interest  at  the  additional  rate  upon  the  funds  belong- 
ing to  his-  policy."  2  Stated  in  the  form  of  a  debit  and  credit 
account,  the  policy  is  credited  under  this  plan  with  (1)  the 
terminal  reserve  at  the  end  of  the  previous  year,  (2)  the  pre- 
mium paid  under  the  policy,  and  (3)  the  interest  actually 
earned  on  these  two  items  minus  investment  expenses;  and  is 
debited  with  (1)  actual  expense  of  conducting  the  business, 
(2)  cost  of  insurance  as  shown  from  the  actual  experience  of 
the  company,  and  (3)  the  terminal  reserve  of  the  policy  at 
the  end  of  the  year.  The  difference  between  the  two  sides  of 

2  DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  70. 


250          THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  account  is  regarded  as  the  surplus  contributed  by  the  pol- 
icy under  consideration. 

Although  regarded  as  theoretically  sound  in  principle,  nu- 
merous difficulties  arise  in  the  application  of  the  plan  and 
many  modifications  of  the  system  are  therefore  found  in  actual 
practice.  In  applying  the  system  some  companies  employ  the 
"  two-factor  method,"  some  use  three  factors,  and  a  few  even 
four.  Under  the  two-factor  method  the  surplus  is  usually 
divided  into  the  following  two  parts:  (1)  that  derived  from 
surplus  interest  and  (2)  that  derived  from  all  other  sources 
combined,  the  gain  from  interest  being  distributed  in  propor- 
tion to  the  reserves  and  the  balance  of  the  surplus  in  propor- 
tion to  the  loadings.  Where  three  factors  are  used,  the  ele- 
ments referred  to  are  saving  from  loading,  saving  from 
mortality  and  gain  from  excess  interest.  In  the  case  of 
deferred  dividend  policies  (those  which  defer  the  distribution 
of  surplus  to  the  policyholder  until  the  end  of  a  stipulated 
number  of  years)  the  dividends  are  usually  computed  in  the 
following  way:  (1)  the  actual  dividends  which  the  policy 
would  have  received  had  it  been  on  the  annual  dividend  plan 
are  ascertained;  (2)  these  annual  dividends  are  accumulated 
at  compound  interest  up  to  the  end  of  the  dividend  period; 
and  (3)  the  accumulated  amount  of  these  annual  dividends  is 
then  increased  by  a  percentage  in  order  to  recompense  the 
policyholder  for  the  risk  which  he  assumes  under  the  deferred 
dividend  system,  and  which  is  not  assumed  under  an  annual 
dividend  plan,  of  losing  the  accumulated  surplus  through 
death,  surrender  or  lapse  during  the  distribution  period. 

The  assessment  of  expenses  probably  presents  the  greatest 
difficulty  connected  with  the  distribution  of  surplus.  By  far 
the  greatest  part  of  the  expenses  of  a  life-insurance  company 
is  the  initial  expenditure  incurred  for  the  procurement  of  new 
business.  With  respect  to  this  large  initial  expense  some  hold 
that  it  should  be  assessed  against  the  new  business,  while  oth- 
ers maintain  that  the  new  business  is  for  the  benefit  of  the 
company  as  a  whole  and  that  the  initial  expense  should  there- 
fore be  assessed  against  the  company's  entire  business.  Fur- 


SURPLUS  251 

thermore,  many  expenses,  such  as  rent,  office  supplies,  salaries, 
office  expense,  advertising,  postage,  etc.,  are  of  a  joint  nature 
and  it  is  difficult  to  identify  the  same  for  the  purpose  of  as- 
sessing them  upon  the  numerous  individual  policies  and  groups 
of  policies  carried  by  an  insurance  company.  This  difficulty 
of  properly  assigning  expenses  to  individual  policies  has  been 
the  subject  of  much  discussion  in  recent  years.  Mr.  Daniel 
H.  Wells,  for  example,  has  suggested  the  following  plan  as 
the  best  method  of  most  nearly  attaining  the  equity  which  it 
is  the  aim  of  the  contribution  method  to  give :  "  Assess  upon 
the  investment  income  all  investment  expenses,  upon  premi- 
ums such  expenses  as  are  determined  by  the  premiums,  and 
upon  the  death  cost,  or  what  is  technically  called  the  cost  of 
insurance,  all  other  expenses."  3  Yet  this  rule,  as  is  prob- 
ably also  true  of  any  other  general  rule  that  can  be  devised, 
still  leaves  the  difficulty  of  identifying  each  of  the  numerous 
expenses  of  a  company  with  reference  to  each  individual  pol- 
icy. In  his  discussion  of  this  complex  question  Professor 
Gephart  is  forced  to  the  conclusion  that  "  absolute  definiteness 
cannot  be  secured,  for  the  best  devised  principles  for  assessing 
insurance  expense  will  meet  many  difficulties  when  the  at- 
tempt is  made  to  apply  them."  * 

Meaning  .of  the  Terms  "  Divisible  Surplus "  and 
1 '  Dividends. ' ' —  Having  ascertained  the  amount  of  surplus 
for  all  policies,  the  company  may  next  set  aside  out  of  this 
amount  a  so-called  "  contingent  reserve."  The  balance  of  the 
surplus  fund  may  be  considered  as  "  dividend  "  or  "  divisible  " 
surplus,  the  terms  having  reference  to  that  part  of  the  surplus 
which  the  management  of  the  company  decides  may  be  re- 
turned with  safety  to  its  policyholders.  The  sums  thus  re- 
turned are  commonly  designated  as  "  dividends  "  or  "  profits," 
although  these  terms  as  used  in  life  insurance  should  not,  as 
is  the  case  in  business  generally,  convey  the  idea  that  the 
amounts  returned  represent  the  "  chance  element  in  produc- 

3  WELLS,  DANIEL  H.,  "  Distribution  of  Surplus,"  Yale  Readings  in 
Life  Insurance,  chap.  19,  264. 

4  GEPHART,  W.  F.,  Principles  of  Insurance,  201. 


252       THE  PRINCIPLES  OF  LIFE  INSURANCE 

tion."  Instead,  we  have  already  seen  that,  with  the  possible 
exception  of  excess  interest  earnings,  surplus  in  life  insurance 
consists  of  salvages,  and  dividends  to  policjholders  therefore 
represent  essentially  the  return  of  that  portion  of  their  pre- 
mium payments  which  the  experience  of  the  company  shows 
to  be  unnecessary  for  the  payment  of  claims  and  the  main- 
tenance of  reserves. 

While  the  companies  may,  in  .the  absence  of  legislation,  use 
their  discretion  in  determining  the  amount  of  surplus  to  be 
distributed  there  is  a  tendency  to  regulate  this  matter  by 
statute.  Thus,  as  a  result  of  the  New  York  insurance  in- 
vestigation of  1906,  that  state  limited  the  amount  of  surplus 
which  a  company  may  withhold  from  policyholders,  the  limit 
varying  from  20  per  cent,  of  the  reserve  liability  in  the  case 
of  smaller  companies  to  5  per  cent,  of  the  reserve  where  the 
same  exceeds  seventy-five  millions  of  dollars.  The  purpose 
of  this  legislation  was  to  prevent  the  company  from  retain- 
ing more  surplus  than  is  necessary  to  offset  the  factors,  such 
as  fluctuations  in  the  mortality  rate  and  in  interest  earnings, 
which  are  apt  to  interfere  with  the  payment  of  uniform  divi- 
dends. It  was  felt  not  only  that  life  insurance  is  not  subject 
to  unusual  losses  such  as  are  experienced  in  fire  insurance, 
and  that  the  aforementioned  limits  are  therefore*  conservative, 
but  that  a  large  surplus  furnishes  a  constant  temptation  for 
the  misuse  of  funds  and  for  extravagance  in  the  conduct  of 
business. 

Methods  of  Distributing  the  Surplus  According*  to  the 
Time  of  Distribution. —  Dividends  may  be  paid  either  an- 
nually or  on  the  deferred- dividend  plan.  The  annual-divi- 
dend plan  is  now  most  generally  used  by  companies  issuing 
participating  policies,  and  in  certain  states  is  required  by 
statute.  The  dividends,  as  will  be  shown  later,  may  be  used 
to  reduce  premiums,  to  purchase  paid-up  additions,  etc.  In 
nearly  all  the  well  established  companies  these  dividends  grad- 
ually increase  from  year  to  year  because  the  increasing  reserve 
value  of  the  policy  results  in  an  increasing  surplus  through  the 
operation  of  the  excess  interest  factor* 


SURPLUS  253 

Deferred  dividends,  as  distinguished  from  annual  divi- 
dends, refer  to  those  which,  according  to  the  terms  of  the  pol- 
icy, are  not  payable  until  the  close  of  a  stipulated  number  of 
years,  such  as  five,  ten,  fifteen  or  twenty  years.  Policies 
providing  for  payment  of  dividends  in  this  manner  are  com- 
monly called  "  deferred-dividend,"  "  accumulation/'  "  dis- 
tribution/' or  "  semi-tontine  "  policies.  The  underlying  prin- 
ciple of  the  plan  is  that  those  policyholders  who  fail  to  con- 
tinue premium  payments  to  the  end  of  the  designated  period 
because  of  death,  surrender  or  lapse,  lose  the  dividends  which 
they  would  have  received  under  the  annual-dividend  plan, 
and  that  the  dividends  thus  lost  revert  to  those  policyholders 
who  continue  their  premium  payments  throughout  the  de- 
ferred-dividend period.  The  system  as  used  at  present  must 
not  be  confused  with  the  so-called  "  tontine  "  plan,  which  was 
at  one  time  extensively  used  in  the  United  States  and  which 
provided  for  a  forfeiture  of  both  dividends  and  policy  value 
upon  failure  to  pay  a  premium,  the  entire  forfeiture  accumu- 
lations being  divided  among  the  persisting  policyholders  at 
the  close  of  the  designated  dividend  period.  As  distinguished 
from  this  plan,  the  deferred-dividend  system  applies  the  for- 
feiture idea  to  dividends  only,  and  thus  reduces  the  chance 
of  large  gains  being  derived  from  the  surrender  or  lapse  of 
policies. 

But  even  in  its  present  form  the  deferred-dividend  plan 
seems  to  be  losing  favor  with  the  public  and  is  being  super- 
seded by  the  annual  distribution  system.  The  latter  plan,  it 
is  argued,  is  not  only  well  adapted  to  the  policyholder  who 
wishes  to  keep  his  annual  premiums  to  the  lowest  possible  fig- 
ures, but  also  serves  the  purpose  of  making  the  company  eco- 
nomical in  the  management  of  its  business  since  extravagance 
will  at  once  be  revealed  by  a  reduction  in  the  annual-dividend 
distribution.  The  deferred-dividend  system,  on  the  other 
hand,  has  met  with  much  opposition  in  recent  years,  although 
the  plan  has  also  many  able  supporters.  Briefly  outlined,  the 
arguments  advanced  against  and  in  favor  of  the  plan  are  the 
following : 


254          THE  PRINCIPLES  OF  LIFE  INSURANCE 

Against  the  plan  it  is  argued: 

1.  That  it  is  the  reverse  of  insurance,  the  fortunate  surviv- 
ors benefiting  at  the  expense  of  those  who  die. 

2.  That  the  plan  is  frequently  not  understood  by  the  in- 
sured at  the  time  the  contract  is  issued,  or,  if  understood,  its 
significance  is  not  properly  appreciated. 

3.  That  the  plan  furnishes  a  temptation  towards  extrava- 
gance in  that  it  gives  the  company  possession  of  large  unas- 
signed  surplus  funds.     This  is  especially  true  where  an  ac- 
counting to  policyholders  is  deferred  until  the  end  of  the  divi- 
dend period,  whereas  under  an  annual  distribution  plan  such 
extravagance  would  not  be  likely  to  occur  since  it  would  come 
to  the  immediate  notice  of  policyholders.    It  is  for  this  rea- 
son that  some  of  the  companies  using  the  plan  give  an  annual 
accounting  to  their  policyholders  of  the  amount  of  surplus 
standing  to  their  credit,  thus  enabling  them  to  judge  whether 
the  company  is  properly  managed. 

4.  That  the  plan  has  been  responsible  in  the  past  for  extrav- 
agant estimates  on  the  part  of  agents  as  to  the  amount  of 
dividends  that  would  be  realized  by  policyholders  who  would 
continue  premium  payments  to  the  end  of  the  dividend  period. 
In  fact  much  of  the  opposition  to  the  system  was  occasioned 
by  the  fact  that  the  estimates  made  far  exceeded  the  results 
obtained,  thus  causing  many  policyholders  to  labor  under  the 
impression  that  they  had  been  deceived  by  the  companies. 

In  favor  of  the  plan  it  is  argued : 

1.  That  it  represents  an  understanding  between  the  insured 
and  the  company  which  is  clearly  set  forth  in  the  contract 
and  which  should  be  known  to  the  insured  at  the  time  the  con- 
tract is  issued.    It  follows  that  the  plan  is  not  morally  wrong 
and  works  no  injustice  to  the  policy  holder  since  he  has  the 
right  to  have  his  dividend  payments  deferred  and  conditioned 
upon  the  payment  of  premiums  during  the  whole  of  the  stipu- 
lated dividend  period. 

2.  That  with  reference  to  a  company's  solvency  the  plan 
is  more  advantageous  than  the  annual  distribution  system  in 

,-that  it  enables  the  company  to  retain  control  of  a  large  fund 


SURPLUS  255 

which  is  free  from  any  definite  liability  and  which  will  serve 
as  a  protection  against  the  depreciation  of  the  company's  as- 
sets in  time  of  financial  panic  or  business  depression.  The 
shortcoming  of  the  annual  distribution  system,  it  is  argued, 
lies  in  the  fact  that  the  company,  owing  to  the  strenuous 
competition  prevailing  in  the  business,  may  possibly  endanger 
its  solvency  by  too  liberal  a  distribution  of  its  surplus  funds. 
How  Dividends  May  Be  Used. —  Having  explained  the 
sources  of  the  surplus,  and  the  methods  of  ascertaining  and 
apportioning  it,  we  may  next  pass  to  a  consideration  of  the  va- 
rious forms  in  which  the  insured  may  receive  his  allotment. 
Briefly  stated,  it  is  customary  for  American  companies  to  allow 
the  insured,  at  his  option,  to  take  his  dividends  in  any  one 
of  the  following  five  ways : 

1.  The  current  dividend  each  year  as  determined  by  the 
company  may  be  withdrawn  in  cash  or  applied  to  the  payment 
of  premiums. 

2.  Instead  of  taking  dividends  in  cash,  the  insured  may 
have  the  same  applied  to  the  purchase  of  non-forfeitable  paid- 
up  additions  to  the  policy.     Such  paid-up  additions  may  be 
either  participating  or  non-participating,  depending  upon  the 
terms  of  the  contract.     Usually  proof  of  good  health  is  not 
required  as  a  condition  precedent  to  the  exercising  of  the  op- 
tion, and  if  required,  such  evidence  of  good  health  need  be' 
furnished  only  once,  namely,  at  the  time  when  this  form  of 
dividend  distribution  is  first  applied  for.    Unless  the  owner  of 
the  policy  elects  some  other  plan,  the  companies  usually  reserve 
the  right  in  their  contracts  either  to  pay  dividends  in  cash  or  to 
apply  the  same  to  the  purchase  of  paid-up  additions. 

3.  Dividends  may  be  allowed  to  accumulate  to  the  credit  of 
the  policy  either  at  a  definite  rate  of  interest  or  at  such  a  rate 
as  may  be  determined  by  the  company,  and  are  withdrawable 
on  any  anniversary  of  the  policy. 

4.  Dividends  may  be  used  to  make  the  policy  a  paid-up  con- 
tract.    This  means  that  whenever  the  reserve  on  the  policy 
and  existing  dividend  additions  at  the  end  of  any  policy  year 
shall  equal  or  exceed  the  net  single  premium  for  the  attained 


256       THE  PRINCIPLES  OF  LIFE  INSURANCE 

age  of  the  insured  according  to  a  given  mortality  table  and  a 
stipulated  rate  of  interest  for  an  amount  of  insurance  equal 
to  the  face  amount  of  the  policy,  the  company,  at  the  request 
of  the  insured,  will  indorse  the  policy  as  paid-up  insurance 
for  such  an  amount  as  the  reserve  will  purchase  at  the  pre- 
mium named. 

5.  Dividends  may  be  applied  to  convert  the  policy  into  an 
endowment,  or  in  the  case  of  endowment  insurance  to  shorten 
the  endowment  term.  Stated  in  another  way,  this  plan 
provides  that  whenever  the  reserve  on  the  policy  and  existing 
dividend  additions  at  the  end  of  any  year  shall  equal  the  face 
amount  of  the  policy,  the  company  upon  its  surrender  will 
pay  the  same  as  a  matured  endowment.  The  surplus  is 
allowed  to  accumulate  with  the  understanding  that  said  ac- 
cumulation is  not  paid  in  the  event  of  death.  In  case  of  sur- 
render or  lapse,  however,  these  accumulated  dividends  are  not 
forfeited,  since  they  are  made  to  constitute  a  part  of  the 
policy's  surrender  value. 

Various  other  ways  of  using  the  surplus  on  behalf  of  the 
insured  may  be  mentioned,  but  their  employment  is  only  oc- 
casional. Under  the  deferred-dividend  plan  the  insured  may 
be  given  the  option  of  having  the  surplus  used  for  the  pur- 
chase of  a  life  annuity  or  temporary  life  annuity,  thus  result- 
ing in  a  reduction  of  future  premiums  if  the  insured  wishes 
to  use  the  annuity  in  that  way.  At  one  time  some  companies 
also  applied  dividends  for  the  purchase  of  an  increased  amount 
of  insurance  for  a  single  year,  but  this  plan  is  no  longer  used 
by  companies. 

BIBLIOGRAPHY 

ALEXANDER,  WM.,  The  Life  Insurance  Company,  Part  I,  chap. 

16,  and  Part  II,  chaps.  4,  5. 
Annual  and  Deferred  Dividends.    Published  annually  by  The 

Spectator  Company. 
DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  chaps.  8, 

9,  13. 
,  Elements  of  Life  Insurance,  ed.  3,  101-117. 


SURPLUS  257 

FACKLER,  EDWARD  B.,  Notes  on  Life  Insurance,  chap.  14,  "  Divi- 
dends." 

GEPHART,  W.  F.,  Principles  of  Insurance,  pp.  186-204. 

Mom,  HENRY,  Life  Assurance  Primer,  chap.  12,  134-139. 

Report  of  Joint  Committee  of  Senate  and  Assembly  of  New 
York,  378-388,  418-429. 

Yale  Readings  in  Life  Insurance,  i,  chap.  19,  "Distribution 
of  Surplus." 


PAET  III 
SPECIAL  FOKMS  OF  LIFE  INSUKANCE 


CHAPTEE  XX 

FRATERNAL  AND  ASSESSMENT  INSURANCE 

Extent  of  Fraternal  Insurance. —  The  preceding  chapters 
are  descriptive  of  "  old-line  "  life  insurance,  i.e.  life  insurance 
based  upon  the  maintenance  of  an  adequate  reserve.  Yet 
a  very  considerable  proportion  of  the  total  life  insurance 
written  in  this  country  is  carried  by  fraternal  orders  which 
for  years  have  conducted  their  operations  on  the  assessment 
plan.  The  509  fraternal  orders  included  in  the  statistics  of 
the  Insurance  Year  Boole  show  insurance  in  force  at  the  end 
of  1913  of  $9,622,000,000,  or  an  amount  nearly  equal  to  47 
per  cent,  of  the  $20,564,000,000  of  insurance  carried  by  the 
old-line  companies.  The  number  of  fraternal  benefit  certifi- 
cates in  force  exceeded  8,000,000,  the  amount  of  new  business 
written  during  the  year  amounted  to  $1,065,000,000,  the 
claims  paid,  $101,000,000,  and  the  assessments,  $129,000,- 
000.  As  has  been  said,  over  one-fourth  of -the  country's  popu- 
lation is  directly  or  indirectly  interested  in  these  societies. 
But  while  the  regular  life-insurance  companies  held  reserves 
of  $3,903,000,000  at  the  close  of  1913  to  guarantee  the  ful- 
fillment of  their  obligations,  the  assets  of  fraternal  orders, 
although  the  face  value  of  their  certificates  amounts  to  nearly 
47  per  cent,  of  the  total  insurance  in  force  with  the  regular 
companies,  amounted  to  only  $183,000,000. 

Organization,  Government,  and  Legal  Status  of  Frater- 
nal Societies. —  The  primary  purpose  of  these  societies  is  to 
enable  their  members,  composed  chiefly  of  persons  with  lim- 
ited means  whose  aim  it  is  to  secure  the  protective  benefits  of 
insurance  at  the  smallest  possible  cost,  to  unite  in  a  fraternal 
way  for  mutual  protection.  In  fact  the  strength  of  the  sys- 
tem and  the  survival  of  most  of  the  large  societies  for  so 

261 


262          THE  PRINCIPLES  OF  LIFE  INSURANCE 

many  years,  despite  the  inherently  defective  methods  which 
have  characterized  their  insurance  business,  are  attributable 
chiefly  to  the  fraternal  tie  which  closely  binds  the  members 
together. 

Generally  speaking,  the  organization  and  government  of  a 
fraternal  society  assumes  the  following  form:  A  parent  so- 
ciety (or  grand  lodge),  governed  according  to  the  terms  of  its 
constitution  and  by-laws,  creates  numerous  local  subordinate 
lodges.  These  local  bodies,  while  usually  allowed  to  regulate 
their  affairs  to  some  extent,  especially  as  regards  their  purely 
benevolent  features,  are  nevertheless  subject  in  all  important 
matters  to  supervision  by  the  parent  society  and  are  governed 
by  the  rules  which  it  adopts.  As  a  rule  some  ritual  is  also 
observed.  Another  feature  of  such  societies  is  the  purely 
democratic  form  of  government  that  prevails,  all  the  members 
having  the  right  to  vote  in  their  respective  lodges  on  matters 
that  affect  the  society  as  a  whole,  such  as  the  selection  of 
officers  and  the  adoption  of  laws.  The  grand  lodge  usually 
consists  of  the  representatives  elected  by  the  members  of  the 
local  lodges,  although  in  some  instances  there  is  a  supreme 
lodge,  composed  of  representatives  selected  by  the  various 
grand  lodges,  each  of  which  in  turn  is  made  up  of  representa- 
tives chosen  by  the  members  of  its  subordinate  local  lodges. 
Some  of  the  societies  are  incorporated  bodies,  while  others 
are  voluntary  associations. 

From  a  legal  point  of  view  fraternal  societies  differ  essen- 
tially from  companies  whose  insurance  operations  are  organ- 
ized on  a  strictly  business  basis.  Most  of  the  states  have 
enacted  legislation  regulating  the  organization  and  conduct 
of  such  societies,  but  in  all  instances  their  benevolent  character 
is  insisted  upon.  Unless  illegal,  their  rules  are  generally  en- 
forced by  the  courts.  The  other  important  legal  character- 
istics of  fraternal  orders  have  been  concisely  summarized  by 
Mr.  Walter  S.  Nichols  as  follows : 1 

1  NICHOLS,  WALTER  S.,  "  Fraternal  Insurance."  A  lecture  deliv- 
ered at  Yale  University,  published  in  Yale  Readings  in  Life  Insur- 
ance, i,  138-139. 


FRATERNAL  AND  ASSESSMENT  INSURANCE     263 

Nearly  all  of  the  societies  have  their  own  adjudicators  for 
determining  the  standing  and  rights  of  their  members,  by 
whose  decision  the  members  must  abide.  These  the  courts  will 
refuse  to  interfere  with  so  long  as  they  act  honestly  and  fairly 
within  their  legitimate  province.  They  are  mutual  societies, 
in  which,  like  churches,  the  members  are  expected  to  abide 
by  the  form  of  government  to  which  they  have  subscribed.  A 
local  lodge  may  be  cut  off  from  affiliation  with  a  parent  society 
or  may  cut  itself  loose  just  as  a  church  may  cut  loose  from 
its  denominational  connection.  In  neither  case  is  the  society 
itself  dissolved.  It  simply  loses  the  rights  which  belong  to  it 
as  a  member  of  the  parent  society  and  must  surrender  what- 
ever is  in  its  possession  and  belonging  to  the  parent.  If  it  has 
a  charter  from  the  state,  the  state  laws  governing  it  as  a  cor- 
poration are  superior  to  any  rules  of  the  association  itself. 

On  one  point,  however,  whether  incorporated  or  not,  the 
courts  are  insistent,  that  is,  no  rule  or  action  of  the  society 
can  deprive  a  local  lodge  or  a  member  of  insurance  or  other 
property  interests  which  are  already  vested,  that  is,  in  which 
an  unconditional  ownership  has  been  established.  Where  they 
are  incorporated,  like  other  corporations  they  are  regarded  by 
the  law  as  artificial  persons  acting  through  their  officers  as 
their  agents  and  with  no  personal  liability  on  the  part  of  the 
members  except  those  imposed  by  the  rules  of  the  society  itself. 
Where  they  are  not  incorporated  their  legal  character  is  not 
so  easily  confined.  They  are  often  regarded  as  a  peculiar  kind 
of  partnership  qualified  by  the  special  purposes  for  which  they 
were  organized. 

Distinctive  Characteristics  of  Fraternal  Insurance. — 

As  insurance  associations,  fraternal  societies  issue  to  their 
members  so-called  "  benefit  certificates/'  according  to  which 
they  promise,  in  return  for  "  assessments "  or  "  contribu- 
tions "  from  the  certificate  holder,  to  pay  certain  stipulated 
"  benefits "  in  the  event  of  death  or  whatever  other  con- 
tingency may  be  covered.  Yet  it  is  apparent  that  "  any  or- 
ganization which  guarantees  the  payment  of  a  definite  sum  of 
money,  under  certain  circumstances,  dependent  upon  the  con- 
tingency of  human  life,  in  return  for  certain  contributions, 
does  an  insurance  business."  The  document  containing  the 
promise  to  pay  may  be  called  a  "  benefit  certificate  "  instead  of 


264        THE  PRINCIPLES  OF  LIFE  INSURANCE 

a  policy,  the  term  "  contribution  "  or  "  assessment n  may  be 
used  instead  of  premium,  and  the  final  payment  in  the  event  of 
death  may  be  designated  as  a  "  benefit "  instead  of  a  claim,  yet 
the  whole  transaction  is  essentially  a  form  of  insurance. 

The  ordinary  life-insurance  policy  is  simply  a  definite 
promise  to  pay,  in  return  for  a  fixed  consideration,  a  stipu- 
lated sum  on  the  occurrence  of  the  specified  contingency,  and 
contains  all  the  conditions  which  govern  the  parties  to  the 
contract.  In  this  respect  fraternal  societies  follow  a  radically 
different  plan.  Although  the  certificate  is  issued  on  the 
basis  of  an  application  2  which  is  similar  to  that  required  by 
regular  old-line  companies,  the  benefit  certificate 3  differs 
from  an  ordinary  policy  in  three  important  particulars : 

1.  The  certificate  is  comparatively  brief,  usually  stating 
that  the  holder  thereof  is  a  member  of  the  society,  that  he  is 
entitled  to  all  its  privileges  and  to  a  certain  portion  of  the 
beneficiary  fund,  and  that  the  society's  promise  in  this  re- 
spect is  conditioned  on  the  member's  compliance  with  the 
constitution  and  laws  of  the  society,  which  are  declared  to  be 
a  part  of  the  contract.     In  other  words  the  benefit  certificate, 
unlike  an  ordinary  life-insurance  policy,  does  not  specify  in 
detail  the  conditions  which  govern  the  indemnity  agreement; 
instead,  these  are  found  in  the  society's  rules. 

2.  The  certificate  merely  recognizes  the  holder's  rights  as 
a  member  in  the  society  to  share  in  the  benefit  for  a  specified 
amount.     The  certificate  remains  the  property  of  the  member, 
who  is  usually  given  the  right  under  the  rules  to  change  the 
beneficiary  at  will,  while  the  ordinary  life-insurance  policy  is 
the  property  of  the  beneficiary  designated  therein  unless  the 
insured  has  expressly  reserved  the  right  in  the  contract  to 
change  such  beneficiary  at  will.     Usually  the  holder  of  a  bene- 
fit certificate  can  only  name  as  beneficiary  some  member  of 
his  family  or  other  dependent. 

3.  The  certificate,  according  to  the  laws  of  most  states, 

2  For  a  specimen  of  such  application,  see  page  465  of  this  volume, 
a  For  a  specimen  copy  of  such  benefit  certificate,  see  page  464  of 
this  voluma 


FRATERNAL  AND  ASSESSMENT  INSURANCE     265 

cannot  be  an  agreement  promising  the  payment  of  a  definite 
amount  for  a  fixed  premium  as  is  the  case  with  old-line 
contracts.  From  a  practical  point  of  view  the  most  impor- 
tant difference  between  fraternal  and  old-line  insurance  has 
been  the  failure  of  the  former  to  maintain  a  reserve  suf- 
ficient to  guarantee  the  payment  of  all  obligations  as  they 
mature.  In  fact,  until  recently,  the  reserve  idea  was  bitterly 
opposed  by  most  fraternal  orders  as  an  unnecessary  over- 
charge. Instead  of  accumulating  adequate  reserves,  the  so- 
cieties proceeded  on  the  plan  of  charging  low  premiums 
(which  experience  soon  demonstrated  to  be  woefully  inade- 
quate) and  reserved  to  themselves  the  right,  in  case  the 
funds  on  hand  should  prove  insufficient  to  meet  current  claims, 
either  to  assess  their  members  for  an  amount  equal  to  the 
deficit  or  to  scale  down  the  amount  of  the  benefit  so  as 
to  make  its  payment  possible  with  the  funds  on  hand.  In 
reality,  therefore,  the  benefit  certificate  does  not  constitute 
a  promise  to  pay  a  definite  amount  for  a  definite  consid- 
eration. Since  they  have  not  promised  to  pay  more  than 
the  funds  on  hand  together  with  the  assessments  which  they 
are  able  to  collect  from  their  members,  enable  them  to  pay, 
fraternal  societies,  considering  the  matter  from  a  purely 
theoretical  standpoint,  cannot  become  insolvent.  Yet  a  very 
large  number  of  such  societies  have  passed  out  of  existence 
as  utter  failures  because  they  were  unable  to  obtain  sufficient 
funds  through  assessments  upon  their  members  to  pay  the 
benefits  upon  which  members  were  relying  for  the  protection 
of  their  families  in  case  of  death  and  for  which  they  had  been 
contributing  for  years. 

The  unfortunate  experience  of  so  many  fraternal  orders  is 
primarily  due  to  the  failure  to  recognize,  until  too  late,  that 
the  only  practicable  plan  of  life  insurance,  as  already  ex- 
plained, is  one  involving  the  payment  of  a  level  premium  and 
the  accumulation  of  an  overcharge  in  the  early  policy  years 
with  a  view  to  meeting  the  deficit  in  the  premium  in  the  later 
policy  years  when  it  is  insufficient  to  meet  the  cost  of  insur- 
ance. The  societies  operated  on  the  plan  of  giving  protec- 


266          THE  PRINCIPLES  OF  LIFE  INSURANCE 

tion  at  the  lowest  possible  cost.  They  went  on  the  theory  that, 
as  benevolent  organizations,  they  should  not  conduct  an  in- 
surance business  for  profit,  and  placed  their  reliance  upon 
the  collection  of  assessments  to  meet  any  unforeseen  con- 
tingencies that  might  arise.  Unusual  deficits  were  not  ex- 
pected because  it  was  believed  that  the  constant  enrollment 
of  young  members  would  keep  the  average  death  rate  about 
the  same  from  year  to  year.  But  even  assuming  that  de- 
ficiencies might  occur,  it  was  believed  that  the  fraternal 
spirit  would  cause  the  membership  to  remain  united  and 
willing  to  pay  the  increased  assessments  which  the  society 
might  see  fit  to  levy. 

Various  Assessment  Plans  that  Have  Been  Used. —  One 
of  the  most  interesting  phases  of  fraternal  insurance  to  study 
relates  to  the  various  assessment  plans  that  have  been  em- 
ployed. The  first  one  to  be  generally  adopted  was  the  "  flat 
assessment"  plan,  according  to  which  the  same  assessments 
were  charged  regardless  of  age.  Manifestly,  this  plan  re- 
sults in  assessing  the  younger  members  much  more  than  the 
actual  cost  of  their  insurance  and  the  older  members  much 
less.  The  assessments  charged  under  this  plan  also  proved  in 
nearly  all  instances  to  be  woefully  inadequate.  In  the  course 
of  time  the  defective  character  of  this  crude  method  became 
apparent.  As  the  age  of  the  members  increased  the  death 
losses  grew  heavier  with  the  result  that  assessments  had 
to  be  increased.  Younger  members  soon  realized  that  they 
were  paying  much  more  than  their  just  share  to  meet  current 
claims,  which,  it  was  observed,  were  being  paid  to  an  increas- 
ing extent  to  the  older  members.  The  younger  members 
would,  therefore,  escape  paying  heavy  assessments  by  with- 
drawing from  the  society,  usually  to  join  some  younger  so- 
ciety where  protection  could  be  obtained  at  a  lower  cost,  while 
the  old  and  infirm  members  would  remain.  Because  of  this 
adverse  selection  the  average  age  of  the  membership  in  the 
society,  and  consequently  the  assessments,  would  rapidly  in- 
crease, thus  further  accelerating  the  rate  of  withdrawal  on  the 
part  of  young  and  healthy  members.  Under  these  conditions 


FRATERNAL  AND  ASSESSMENT  INSURANCE     267 

it  would  soon  become  impossible  to  secure  any  more  new 
members.  The  proportion  of  the  remaining  members  who 
were  aged  or  infirm  would  now  rapidly  increase  and  death 
losses  would  also  increase  correspondingly.  With  the  mem- 
bership decreasing  and  death  losses  rapidly  increasing,  as- 
sessments would,  in  the  course  of  time,  reach  prohibitive 
figures  with  the  result  that  the  society  would  dissolve,  thus 
depriving  a  large  number  of  old  or  sickly  certificate  holders  of 
the  protection  for  which  they  had  contributed  for  years  and 
which,  under  the  circumstances,  could  not  be  replaced  with 
insurance  in  a  regular  company.  The  influence  exerted  by 
this  adverse  selection  is  indicated  by  the  two  following  actual 
examples.4  The  first  column  in  each  case  represents  the 
membership  of  the  society  and  the  second  column  the  num- 
ber of  deaths  per  1,000  during  successive  years.  It  will 
be  noticed  that  in  the  case  of  the  first  society,  for  example, 
the  membership  decreased  in  eleven  years  from  62,457  to 
16,894,  or  nearly.  73  per  cent.,  while  the  death  rate  increased 
from  12.5  per  1,000  to  33.9,  or  over  171  per  cent. 

I  II 

MEMBERS'  DEATH  RATE  MEMBERS'  DEATH  RATE 

62,457  —  12.5  126,128  —  13.7 

62,574  —  13.0  131,031  —  13.2 

61,355  —  15.4  135,368  —  14.8 

60,554—16.4  132,674  —  16.1 

60,076  —  16.5  127,073  —  16.1 

56,060  —  16.1  123,380  —  16.4 

53,210—18.4  119,785  —  16.6 

36,028  —  21.8  115,212  —  17.7 

21,316  —  26.8  96,633—19.0 

19,119  —  30.1  89,679  —  22.3 

16,894  —  33.9  82,256—22.2 


The  next  assessment  plan  to  be  generally  adopted  was  the 
so-called  "  graded  assessment."  Here  assessments  were  graded 
according  to  the  age  of  entry,  varying,  for  example,  from  $.60 
at  age  20  to  $2.50  at  age  60.  It  was,  however,  again  the 
purpose  of  the  society  to  collect  just  enough  to  pay  current 

4  These  examples  are  cited  in  B.  H.  Meyer's  "  Fraternal  Insurance 
in  the  United  States,"  published  in  the  Annals  of  the  America^ 
Academy  of  Political  and  Social  Science,  March,  1901,  83. 


268        THE  PRINCIPLES  OF  LIFE  INSURANCE 

losses,  and  the  rates  were  intended  to  represent  approximately 
the  mortality  at  the  several  ages.  Moreover,  the  rates  were 
not  changed  and  a  member  who  entered  the  society  at  age 
25  would  continue  to  pay  the  rate  for  that  age  during  subse- 
quent years.  This  plan,  it  is  clear,  although  not  as  crude 
as  the  preceding  one,  nevertheless  becomes  increasingly  ad- 
vantageous to  the  members  as  they  grow  older  and  therefore, 
like  the  preceding  plan,  also  works  a  hardship  upon  the 
younger  members. 

A  third  plan  had  in  view  increasing  the  rate  as  the  member 
grows  older,  but  this  plan  it  is  apparent  will  prove  unat- 
tractive if  extended  to  very  advanced  ages.  Consequently 
the  rates  under  this  plan  were  not  increased  after  the  member 
attained  a  stipulated  age  like  sixty. 

Recent  Tendency  to  Adopt  the  Protective  Features  of 
Old-Line  Insurance. —  All  the  aforementioned  assessment 
plans  proved  exceedingly  unsatisfactory,  despite  the  fact  that 
fraternal  societies  have  generally  been  exemplary  in  the  mat- 
ter of  selecting  risks  and  in  keeping  expenses  down  to  a  very 
low  figure.  Accordingly  the  societies  have  attempted  in 
recent  years  to  devise  ways  and  means  of  strengthening  their 
financial  position,  and  many  have  secured  the  services  of  ac- 
tuaries for  the  purpose.  Many  of  the  societies  have  accumu- 
lated some  sort  of  reserve  or  emergency  fund,  but  in  the  great 
majority  of  instances  this  fund  falls  far  short  of  being  an 
adequate  reserve.  It  is  encouraging  to  note,  however,  that 
those  in  charge  of  the  leading  societies  now  fully  realize 
that  there  is  only  one  correct  plan  of  insurance,  namely,  that 
based  on  scientific  principles,  and  that  fraternal  insurance, 
if  it  is  to  guarantee  its  benefits  and  be  a  permanent  factor 
in  the  community,  must  be  conducted  on  the  same  scientific 
basis  that  the  old-line  companies  have  wisely  made  the  founda- 
tion of  their  enormous  business.  In  fact,  some  of  the  so- 
cieties have  already  adopted  either  level  rates  computed  scien- 
tifically on  the  basis  of  the  National  Fraternal  Congress  table 
of  mortality,  or  the  so-called  "  step-rate  "  plan.  This  latter 
plan  consists  of  level  rates  increasing  for  successive  terms  of 


FRATERNAL  AND  ASSESSMENT  INSURANCE      269 

five  or  ten  years.  The  increasing  term  rates,  however,  apply 
only  to  the  working  period  of  life  and,  at  about  age  60,  merge 
into  a  level  rate  for  the  rest  of  life. 

In  trying  to  reorganize  their  scale  of  rates  the  societies  are 
encountering  much  opposition  from  their  members  and  are 
experiencing  much  difficulty  in  educating  them  to  an  under- 
standing of  the  situation.  The  problem  involved  is  a  serious 
one  since  many  of  the  societies  have  been  in  existence  for 
many  years  and,  owing  to  their  inadequate  rates  'during  the 
whole  of  their  existence,  are  now  obliged  to  increase  their  rates 
enormously  in  order  to  meet  current  claims.  In  other  words, 
their  problem  is  to  find  some  way  of  meeting  the  situation 
which  has  grown  out  of  the  accumulating  deficits  of  past 
years.  And  in  trying  to  solve  this  problem  the  societies  must 
contend  with  the  conflicting  interests  of  different  classes  of 
members.  The  older  members  naturally  favor  the  retention 
of  the  old  methods,  since  the  raising  of  rates  at  the  older 
ages  to  an  adequate  basis  would,  in  many  instances,  mean  an 
unbearable  burden.  The  younger  members,  on  the  other  hand, 
feel  that  they  should  not  be  asked  to  contribute  for  the  benefit 
of  the  older  members,  and  are  therefore  not  so  inclined  to 
oppose  a  more  equitable  rate  adjustment.  In  their  attempts 
to  reform  their  rating  systems  the  societies  have  in  most  in- 
stances tried  to  compromise  between  these  two  classes  of 
members,  i.e.  when  deficiencies  made  it  necessary  rates  were 
increased  but  the  increase  was  greater  at  the  older  ages  than 
at  the  younger  ones.  Many  feel  that  the  only  solution  avail- 
able is,  as  Mr.  Walter  S.  Nichols  puts  it,  "  to  so  regulate  the 
inequality  between  the  groups  that  additions  to  the  young 
membership  can  be  kept  up  until  such  time  as  the  rates  can 
step  by  step  be  finally  raised  to  an  adequate  basis."  5 

Recent  Legislation  Concerning  Rate  Adjustments. —  As 
indicating  the  present  tendency  to  bring  about  a  gradual 
adjustment  of  fraternal  rates,  mention  should  be  made  of  the 
so-called  "  Mobile  Bill "  which  has  been  receiving  the  hearty 

s  NICHOLS,  WALTER  S.,  "  Fraternal  Life  Insurance,"  Tale  Reading* 
in  Life  Insurance,  i,  149. 


270          THE  PRINCIPLES  OF  LIFE  INSURANCE 

support  of  the  two  great  associations  of  fraternal  societies  in 
the  United  States,  the  National  Fraternal  Congress  and  the 
Associated  Fraternities  of  America  (recently  merged  into  one 
association)  and  which  has  been  adopted  by  a  large  number 
of  states.  The  bill  may  best  be  described  as  a  compromise, 
concessions  having  been  made  on  both  sides.  It  does  not 
undertake  to  fix  the  net  rates  for  any  order ;  instead,  present 
inadequate  rates  are  to  be  increased  gradually,  and  this  policy 
is  to  be  expedited  through  the  education  of  the  fraternal 
membership  to  the  necessity  of  such  an  increase.  The  bill, 
as  originally  drawn,  provided  that  after  1912  each  benefit 
society  was  to  report  to  the  insurance  department  a  valuation 
of  its  certificates,  the  minimum  basis  of  the  valuation  to 
be  the  National  Fraternal  Congress  table  of  mortality.  Since 
such  a  valuation  is  sure  to  show  a  heavy  deficiency  in 
many  of  the  societies,  the  bill  further  provided  that  the 
valuation  was  not  to  be  considered  as  a  test  of  financial 
solvency.  The  results  of  the  valuation,  however,  including 
an  explanation  of  the  system,  were  to  be  furnished  to  the  mem- 
bers of  the  societies  beginning  in  1914,  with  a  view  to  educat- 
ing them  to  the  need  of  higher  rates.  It  was  also  provided 
that  the  valuation  of  December  31,  1917,  must  be  reported 
to  the  insurance  departments,  and  that  if  the  admitted  assets 
at  that  time  prove  to  be  less  than  90  per  cent,  of  the  reserve 
and  other  liabilities,  the  deficit  must  "  show  a  reduction  of 
at  least  5  per  cent,  at  each  triennial  valuation  thereafter,"  and 
that  "  if  such  a  reduction  has  not  been  made,  and  no  good 
reason  exists  the  insurance  department  may  proceed  to  cancel 
the  society's  license,  or  begin  proceedings  for  the  society's 
dissolution."  It  is  thus  seen  that  the  bill  grants  a  society 
many  years,  in  case  of  a  large  deficit,  in  which  to  place  itself 
in  a  technically  solvent  condition.  Under  the  bill  societies 
are  also  enabled  to  group  their  membership.  New  members 
and  such  old  members  as  care  to  enter  the  plan  may  be 
charged  adequate  rates  with  mathematical  reserves,  while 
the  other  members  may  be  permitted  to  continue  in  what 
practically  amounts  to  a  separate  order. 


FRATERNAL  AND  ASSESSMENT  INSURANCE      271 

The  history  of  fraternal  insurance  during  the  last  four  or 
five  years  has  largely  centered  around  the  Mobile  Bill  and  it 
has  from  time  to  time  been  considered  necessary  to  modify 
the  bill  in  certain  respects.  Generally  speaking  the  bill  is 
now  supported  by  all  the  leading  societies  and  also  has  the 
hearty  approval  of  the  insurance  commissioners.  At  the  close 
of  1913  twenty-three  states  had  enacted  the  bill  in  either  its 
original  or  modified  form.  Furthermore,  the  principles  of 
the  bill  are  enforced  through  official  rulings  in  at  least  eleven 
additional  states. 

Business-Assessment  Associations. —  A  discussion  of  as- 
sessment life  insurance  is  not  complete  without  reference 
to  the  numerous  local  societies  which  at  one  time  granted 
insurance  in  the  United  States  on  the  assessment  plans 
already  referred  to,  but  which  were  neither  fraternal  in  char- 
acter nor  organized  on  the  lodge  system.  These  societies  were 
generally  known  as  "business-assessment  associations"  to 
distinguish  them  from  fraternal  societies.  Almost  universally, 
however,  these  associations  failed  to  follow  sound  business 
methods  in  writing  insurance.  In  nearly  all  instances  their 
managers  ignored  actuarial  principles  and,  like  the  fraternal 
societies,  took  the  position  that  the  accumulation  of  reserves 
was  an  unnecessary  practice  which  served  only  to  increase 
the  cost  of  insurance.  They,  therefore,  employed  various 
assessment  plans  and  as  a  consequence  encountered  the  same 
difficulties  experienced  by  fraternal  societies.  The  local  and 
non-fraternal  character  of  the  societies,  however,  caused  the 
consequences  of  defective  rating  systems  to  show  themselves 
much  more  quickly  and  effectively,  and,  as  a  result,  although 
fraternal  insurance  still  ranks  as  a  leading  form  of  life  insur- 
ance, practically  all  the  important  assessment  societies  have 
either  passed  out  of  existence  or  have  been  reorganized  into 
old-line  companies.  As  compared  with  fraternal  orders,  busi- 
ness assessment  societies  were  greatly  handicapped  in  over- 
coming the  defects  of  their  system  in  that  they  lacked  the  bene- 
fits of  a  lodge  relationship  and  the  strong  fraternal  tie  that 
binds  the  members  together  and  causes  them  to  stand  by  each 


272        THE  PRINCIPLES  OF  LIFE  INSURANCE 

other  in  time  of  adversity.  In  other  words,  they  lacked  the 
fraternal  feeling  among  their  members  and  were  really  nothing 
more  than  ordinary  companies  organized  solely  for  the  pur- 
pose of  giving  insurance  at  rates  much  lower  than  those 
charged  by  old-line  companies.  As  compared  with  the  fra- 
ternal orders,  business  assessment  associations  were  also 
operated  at  a  much  greater  expense,  and  in  many  instances 
their  medical  selection  of  risks  was  decidedly  inferior. 

Assessment  Plans  Used  by  Such  Associations. —  The 
earliest  associations  were  operated  on  the  "flat  assessment 
plan,"  i.e.  upon  the  death  of  any  member  all  the  other  mem- 
bers would  be  called  upon  to  pay  an  assessment  which  was 
equal  for  all  and  just  large  enough  to  pay  the  claim.  While 
mostly  local  in  character  certain  of  the  associations  were  con- 
nected with  some  trade  or  profession,  and,  instead  of  limiting 
their  membership  to  a  particular  locality,  sought  business 
wherever  it  could  be  found,  and  in  certain  instances  even  or- 
ganized an  agency  system  for  the  purpose.  In  the  latter 
case  the  management  was  more  apt  to  be  such  as  would  dis- 
cern the  shortcomings  of  the  pure  assessment  plan.  Accord- 
ingly, we  find  that  this  latter  class  of  associations  showed  a 
greater  vitality  and  was  the  first  to  require  either  the  payment 
of  the  assessment  in  advance  (instead  of  a  post  mortem  as- 
sessment) or,  as  was  done  later,  to  collect  an  extra  sum  to 
create  an  emergency  fund  which  could  be  drawn  upon  when 
necessary  and  thus  avoid  the  necessity  of  levying  extra  assess- 
ments. But  those  who  adopted  this  plan  still  condemned  the 
mathematical  reserve  idea,  and  usually  explained  their  emer- 
gency fund  collections  as  nothing  more  than  a  means  of 
making  extra  assessments  unnecessary  in  case  the  mortality 
should  exceed  "  10  per  1,000  "  or  "  the  losses  according  to 
the  American  Experience  table  of  mortality."  Some  of  the 
societies  succeeded  in  this  way  in  accumulating  considerable 
assets,  although  in  nearly  all  instances  the  fund  was  woefully 
inadequate  to  guarantee  the  payment  of  the  association's  obli- 
gations at  the  rates  and  assessments  which  were  being  collected. 
Various  societies  also  made  use  of  the  "graded  assessment 


FRATERNAL  AND  ASSESSMENT  INSURANCE      273 

plan  "  at  an  early  date,  the  rate  being  determined  by  the  age 
at  entry  and  remaining  the  same  during  the  continuance  of 
membership. 

When  it  became  apparent  that  the  flat  and  graded  assess- 
ment plans  were  grossly  unsound,  several  of  the  associations 
adopted  the  "  stipulated-premium "  plan.  This  method  in- 
volved not  only  the  collection  of  the  estimated  cost  of  insur- 
ance in  advance,  but  the  accumulation  of  a  reserve  fund  whose 
purpose,  according  to  the  managers  of  the  association  using 
the  plan,  was  to  "  equalize  the  cost "  of  the  insurance  during 
the  later  policy  years.  Here  we  have  a  recognition  of  the 
mathematical  reserve  idea,  but  it  should  be  noted  that  the 
reserve  fund  accumulated,  usually  being  accomplished  by  add- 
ing a  certain  sum  per  $1,000  of  insurance  or  a  certain  per- 
centage of  the  rate  of  mortality  at  the  age  of  entry,  fell 
far  short  of  equaling  the  reserve  maintained  by  old-line  com- 
panies. In  the  case  of  at  least  one  important  business  as- 
sessment association,  which  has  since  been  successfully  reor- 
ganized into  an  old-line  mutual  company,  the  stipulated  pre- 
mium was  so  computed  that,  assuming  a  given  lapse  ratio,  the 
rate  it  was  felt  could  be  kept  level  if  no  surrender  values 
were  allowed. 

After  the  difficulties  inherently  connected  with  any  assess- 
ment plan  which  does  not  involve  the  maintenance  of  an 
adequate  reserve  became  more  apparent,  a  considerable  num- 
ber of  the  important  associations  undertook  to  reorganize  them- 
selves into  legal  reserve  companies.6  In  fact  this  movement 

6  In  such  reorganizations,  as  stated  by  Mr.  Dawson,  the  associa- 
tions "  dealt  with  their  assessment  membership  chiefly  in  the  fol- 
lowing manner,  viz:  by  carrying  out  their  contracts  with  such  of 
them  as  would  not  transfer  to  regular  '  old-line '  plans,  abandoning 
their  assessment  policies.  In  such  cases,  the  cost  to  those  who 
persisted  upon  the  assessment  plan,  has  naturally  been  high;  but 
they  at  least  have  had  the  advantage  that  the  death  claims  were 
paid  and  that  their  insurance  was  good  for  its  face,  instead  of  being 
utterly  wiped  out  by  the  failure  of  the  institution.  In  one  or  two 
cases,  this  reorganization  was  attempted  at  too  late  a  date,  or  was 
accompanied  by  such  extravagance  and  mismanagement  that  the 
reorganized  company  was  not  successful."  ( Miles  M.  Dawson,  "  As- 


274       THE  PRINCIPLES  OF  LIFE  INSURANCE 

considerably  preceded  the  similar  movement  towards  old-line 
methods  which  is  now  assuming  such  large  proportions  in 
the  field  of  fraternal  insurance. 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  Assessment  Insurance.    New  York,  1896. 

,  The  Business  of  Life  Insurance,  chap.  30  on  "  The 

Readjustment  of  Rates  in  Fraternal  Insurance  Orders." 

"  Assessment  Life   Insurance,"   in  H.  P.  Dunham's 


The  Business  of  Insurance,  chap.  26,  416-437. 

— ,  "  Assessment  Life  Insurance "  and  "  Fraternal  Life 

Insurance,"  Annals  of  the  American  Academy  of  Political 
and  Social  Science,  xxvi,  120-36. 

MEYER,  B.  H.,  "  Fraternal  Insurance  in  the  United  States." 
Annals  of  the  American  Academy  of  Political  and  Social 
Science,  March,  1901,  80-106. 

NICHOLS,  WALTER  S.,  "  Fraternal  Life  Insurance."  Yale  Read- 
ings in  Life  Insurance,  i,  chap.  10,  132-154. 

sessment  Life  Insurance,"  in  H.  P.  Dunham's  The  Business  of  Life 
Insurance,  i,  432.) 


CHAPTEE  XXT 
INDUSTRIAL  INSURANCE 

The  Purpose  of  Industrial  Insurance. —  Industrial  insur- 
ance, as  the  name  implies,  is  a  form  of  life  insurance  especially 
designed  to  meet  the  requirements  of  the  wage-earning  or  in- 
dustrial population.  Its  primary  purpose  is  to  provide  for 
this  large  element  in  our  population  an  absolutely  certain 
method  of  acquiring  the  funds  necessary  to  assure  a  decent 
burial  and  the  payment  of  the  expenses  for  medical  at- 
tendance during  the  last  illness.  But  while  this  special  pur- 
pose has  caused  industrial  insurance  to  become  popular  among 
wage-earners,  its  beneficent  influence  in  other  directions  de- 
serves special  mention.  Just  as  we  found  that  ordinary  life 
insurance  constitutes  a  powerful  factor  for  inculcating  thrift, 
so  the  weekly  premium  plan  used  in  industrial  insurance 
has  been  one  of  the  important  means  of  educating  a  large 
class,  which  naturally  finds  it  difficult  to  provide  for  con- 
tingencies, in  systematic  saving.  Weekly  premium  payments 
—  five,  ten  or  twenty-five  cents  a  week  to  meet  the  cost 
of  insurance;  —  soon  develop  a  habit  of  saving  which  will 
have  its  wholesome  effect  in  other  directions.  Industrial 
insurance  also  renders  the  further  service  of  familiarizing 
the  masses  with  the  benefits  of  insurance,  and  has  thus 


of  insurance.     The  wage-earner  of  to-day  becomes  the  shop-> 


been  responsible  for  greatly  increasing  the  uses  of  other  kinds 

X    l' 

keeper  and  salaried  man  of  to-morrow  and,  having  become  , 
acquainted  with  the  beneficial  results  of  industrial  insurance, 
he  will  be  in  a  much  better  position  to  appreciate  the  value  of 
•)ther  forms   of  insurance,  such  as  ordinary  life,   accident, 
health,  fire,  etc. 

Magnitude  of  the  Business. —  The  success  which  the  in- 

275 


276        THE  PRINCIPLES  OF  LIFE  INSURANCE 


dustrial  companies  have  achieved  is  clearly  indicated  by  the 
remarkable  growth  of  the  business,  especially  since  1890.1 
Beginning  in  the  United  States  as  late  as  1875,  the  business 
has  grown  by  leaps  and  bounds  until  it  has  reached  enormous 
proportions.  On  December  31,  1913,  twenty-nine  industrial 
companies  were  operating  in  the  United  States,  and  their 
industrial  insurance  at  that  time  represented  29,243,950 
policies  with  a  face  value  of  $3,962,385,087,  or  an  amount 
nearly  equal  to  24  per  cent,  of  the  total  ordinary  life  insurance 
in  force  in  all  American  companies.  The  admitted  assets  of 
these  companies  at  the  close  of  1913,  as  regards  their  indus- 
trial business,  amounted  to  over  $910,000,000,  the  premium 
income  received  during  the  year  to  nearly  $219,000,000,  and 
the  claims  paid  to  $60,000,000. 

It  is  also  worthy  of  note  that  by  far  the  largest  share  of 
the  business  is  controlled  by  three  companies,  and  these  it 
may  be  stated  were  the  first  to  undertake  this  form  of  insurance 
in  the  United  States.  The  combined  industrial  business  of 
these  three  companies  on  December  1,  1913,  represented  25,- 
296,622  policies  or  over  86  per  cent,  of  the  total  policies,  with 
a  face  value  of  $3,632,031,830  or  nearly  92  per  cent,  of  the 
total  insurance  written.  One  of  the  companies  carried  nearly 
13,000,000  industrial  policies  and  another  over  11,000,000,  and 

1  The  growth  of  industrial  insurance  is  indicated  by  the  following 
table,  compiled  from  the  Insurance  Year  Book: 


YEAR 

NUMBER  OF 
COMPANIES 

INSURANCE 
WRITTEN 
DURING  THE 
YEAR 

NUMBER  OF 
POLICIES  IN 
FORCE  AT  END 
OF  YEAR 

TOTAL 
INSURANCE 
IN  FORCE  AT 
END  or  YEAR 

1876 
1880 
1885 
1890 
1895 
1900 
1905 
1910 
1913 

1 
3 
3 
9 
11 
18 
20 
22 
29 

727,168 
34,768,035 
93,736,727 
242,250,959 
380,832,362 
566,037,936 
661,097,015 
749,717,264 
845,962,307 

4,816 
228,357 
1,360,376 
3,875,102 
6,943,769 
11,215,531 
16,869,758 
23,044,162 
29,243,950 

443,072 
19,590,780 
144,101,632 
428,037,245 
819,521,573 
1,468,474,534 
2,309,886,554 
3,179,489,541 
3,962,385,087 

INDUSTRIAL  INSURANCE  277 

their  insurance  in  force  amounted  to  $1,778,000,000  and  $1,- 
462,000,000,  respectively.  In  1909  the  three  companies  re- 
ferred to  had  about  750  superintendents,  about  3,800  assistants, 
and  about  21,000  agents. 

Comparison  of  Industrial  with  Other  Forms  of  Life 
Insurance. —  Although  industrial  insurance  is  a  modified 
form  of  ordinary  level  premium  insurance,  and  is  in  most 
instances  written  by  companies  which  also  write  life  insur- 
ance on  the  ordinary  plan,  there  are  certain  fundamental 
characteristics  which  distinguish  it  from  all  other  forms  of 
life  insurance.  Briefly  stated  these  distinctive  characteris- 
tics are : 

1.  The  premiums  are  payable  weekly  whereas  in  ordinary 
life  insurance  they  are  payable  annually,  semi-annually  or 
quarterly.     This  may  be  regarded  as  the  most  important  dif- 
ference since  the  feasibility  of  industrial  insurance  depends 
upon,  and  the  organization  of  the  company's  agency  system 
must  be  adapted  to,  this  particular  method  of  paying  pre- 
miums.    Experience  has  demonstrated  the  necessity  of  very 
frequent  premium  collections  if  life  insurance  is  to  be  widely 
disseminated  among  the  wage-earning  class. 

2.  The  premiums,  instead  of  being  payable  at  the  office  of 
the  company  as  is  usually  the  case  in  ordinary  life  insurance, 
are  collected  weekly  by  the  companies'  agents  from  the  homes 
of  the  insured. 

3.  The  amount  of  the  insurance  is  "  adjusted  to  the  unit 
of  premium,"  customarily  five  cents,  or  a  multiple  thereof, 
up  to  seventy  cents.     Thus  in  industrial  insurance  we  speak 
of  five-,  ten-  or  fifteen-cent  policies,  and  the  amount  of  in- 
surance obtainable  for  that  weekly  premium  will  vary  ac- 
cording to  age  of  entry  and  will  represent  odd  figures.     In 
ordinary  life   insurance,   on   the   contrary,   the  unit   is  the 
amount  of  insurance.     We  thus  refer  to  $1,000,  $2,000,  etc., 
policies,  and  the  factor  that  varies  with  the  age  of  entry  is 
the  premium. 

4.  The  insurance  is  extended  to  every  member  of  the  family, 
and  the  companies  therefore  issue  both  adult  and  infantile 


278        THE  PRINCIPLES  OF  LIFE  INSURANCE 

policies,  while  in  ordinary  life  insurance  the  business  is  con- 
fined almost  wholly  to  adult  risks.  In  nearly  all  the  com- 
panies industrial  insurance  is  made  to  comprise  all  ages  be- 
tween one  and  seventy.  Some  of  the  smaller  companies  even 
insure  children  before  they  are  one  year  old. 

With  the  exception  of  the  differences  just  noted  and  the 
resulting  differences  in  field  and  office  methods,  industrial 
insurance  is  essentially  the  same  as  ordinary  life  insurance. 
Premiums  for  both  children  and  adults  are  calculated  upon 
an  actuarial  basis,  although,  owing  to  the  heavier  mortality 
experienced  among  industrial  risks,  a  special  mortality  table 
is  used  for  computation  purposes.  The  system  is  also  based 
upon  the  legal  reserve  plan,  and  as  will  be  noted  later  the 
policies  issued  contain  nearly  all  the  essential  conditions  found 
in  ordinary  life  contracts. 

Adjustment  of  the  Amount  of  Insurance  to  the  Unit  of 
Premium. —  Since  the  death  rate  decreases  from  birth  to 
about  age  10,  it  follows  that  the  amount  of  insurance  that 
can  be  given  for  a  unit  of  premium,  like  five  cents,  will  in- 
crease as  the  age  of  the  child  increases.  Thus,  in  one  leading, 
company,  for  example,  the  amount  payable  on  a  policy  with 
a  weekly  premium  of  five  cents  "  in  the  case  of  a  child  in- 
sured at  age  two  next  birthday  is  $12.50  when  the  duration 
of  insurance  has  been  less  than  six  months,  $25.00  when  the 
duration  is  more  than  six  months,  but  less  than  one  year, 
$34.00  when  the  duration  is  one  year,  $40.00  at  two  years, 
$48.00  at  three  years,  $58.00  at  four  years,  $70.00  at  five  years, 
$110.00  at  six  years,  $150.00  at  seven  years,  and  $190.00  at 
eight  years." 

In  the  case  of  adults,  on  the  contrary,  the  amount  of 
insurance  that  can  be  given  for  a  unit  of  premium  must  de- 
crease in  accordance  with  the  increasing  death  rate  that  occurs 
following  about  age  10.  Thus  in  the  aforementioned  com- 
pany, "  for  a  premium  of  five  cents  at  age  10  the  amount 
payable  in  the  event  of  death  after  the  policy  has  been  six 
months  in  force  is  $150.00,  at  age  20  the  amount  payable  is 
$105.00,  at  age  30  it  is  $79.00,  at  age  40  it  is  $57.00,  at 


INDUSTRIAL  INSURANCE  279 

age  50  it  is  $38.00,  and  at  age  60  it  is  $22.00."  Usually 
infantile  premiums  are  limited  to  ages  under  10  and  adult 
premiums  to  ages  10  to  65  or  70,  inclusive.  It  is  also  the 
practice  to  restrict  the  maximum  amount  of  insurance  that 
may  be  taken  at  certain  ages  under  either  infantile  or  adult 
policies. 

Organization  and  Management  of  the  Field  Force.— 
Owing  to  the  weekly  collection  of  premiums  at  the  homes  of 
the  insured,  it  is  necessary  to  organize  the.  agency  system  in 
industrial  insurance  with  special  reference  to  the  needs  of 
the  business.  To  facilitate  the  efficient  handling  of  the 
enormous  volume  of  details  necessarily  connected  with  weekly 
collections,  the  company's  territory  is  divided  into  districts 
which  are  usually  made  to  coincide  with  the  leading  cities, 
although  in  the  very  large  cities  like  New  York,  Philadelphia, 
etc.,  several  districts  exist.  Each  district  is  supervised  by  a 
superintendent  who  has  a  number  of  assistant  superintendents 
and  numerous  agents  under  him.  The  agents  are  expected 
to  collect  all  outstanding  premiums,  and,  according  to  the 
system,  each  has  assigned  to  him  a  "  weekly  debit  "  which  rep- 
resents the  difference  between  "the  premiums  of  the  total 
number  of  policies  issued  to  a  particular  agency  and  the 
premiums  of  the  total  number  of  policies  lapsed  by  reason  of 
death,  transfer  or  other  causes."  2 

Generally  speaking  an  agent  is  expected  to  collect  each 
week  about  $60  or  $70,  although  in  many  instances  the  amount 
is  considerably  larger.  In  addition  to  this  collection  service, 
he  is  also  required  to  solicit  new  business  on  both  the  indus- 
trial and  ordinary  plans.  It  is  therefore  essential,  if  agents 
are  to  be  given  sufficient  time  for  the  solicitation  of  new 
business,  to  restrict  the  amount  that  an  agent  is  required  to 
collect  as  well  as  to  concentrate  such  collections  as  much  as 
possible  within  a  limited  area.  We  are  informed  that  "the 
collection  system  has  been  so  completely  developed  that  in  the 

2  HOFFMAN,  FREDERICK  L.,  "  Industrial  Life  Insurance,"  in  H.  P. 
Dunham's  The  Business  of  Insurance,  i,  469. 


280       THE  PRINCIPLES  OF  LIFE  INSURANCE 

case  of  well  managed  industrial  companies  the  average  col- 
lection percentage  runs  almost  100."  3 

All  weekly  collections  are  entered  by  the  agents  in  a  so- 
called  "  collection  book/'  these  entries  corresponding  to  those 
made  in  the  policyholder's  receipt  book.  Once  each  week  the 
agent  must  also  render  an  account  to  the  company  which 
furnishes  a  complete  statement  of  all  payments  and  arrears. 
Moreover,  to  discourage  lapses  as  much  as  possible  through 
the  efforts  of  agents,  commissions  on  new  business  are  allowed 
only  on  the  net  increases,  i.e.  if  the  new  business  obtained  in 
any  week  should  represent  a  weekly  premium  of  $1.00  and 
the  terminations  of  old  policies  for  reasons  other  than  death 
or  transfer  should  represent  a  weekly  premium  of  25  cents, 
a  commission  will  only  be  allowed  on  the  difference,  or 
75  cents.  It  is  also  customary  for  the  companies  to 
require  their  agents  to  write  a  certain  amount  of  new  busi- 
ness. 

Distinctive  Features  of  the  Policy. —  In  most  respects 
the  industrial  policy  is  similar  to  that  issued  to  ordinary 
life  policyhoiders ; 4  nor  do  the  contracts  of  the  various  in- 
dustrial companies  differ  much  in  their  essential  terms.  A 
few  provisions,  however,  are  so  peculiar  to  industrial  policies 
and  have  such  an  important  bearing  upon  the  business  as  to 
merit  special  mention.  These  may  briefly  be  referred  to 
under  the  following  heads : 

1.  Benefits  during  the  first  year. —  It  is  customary 
for  the  company  to  pay  only  one-half  of  the  insurance  in 
the  event  of  death  before  the  policy  has  been  in  force  six 
months,  the  full  amount  being  paid  if  death  occurs  after 
six  months  from  the  date  of  the  contract.  In  some  instances 
the  practice  is  followed  of  paying  only  one-third  of  the  in- 
surance if  death  occurs  during  the  first  six  months  follow- 
ing the  issue  of  the  policy,  one-half  if  it  occurs  after  six 
months  and  within  one  year,  and  the  full  amount  if  it  occurs 
after  one  year. 

3  ibid.,  p.  468. 

4  For  a  specimen  industrial  policy,  see  page  455  of  this  volume. 


INDUSTRIAL  INSURANCE  281 

2.  Special  provisions  affecting  the  policyholder. 
—  Most  of  the  privileges  granted  to  industrial  policyholders 
are  also  found,  as  regards  the  principles  involved,  in  ordinary 
life  contracts.  Some  of  these  provisions,  however,  must  be 
adapted  to  conform  to  the  special  requirements  of  the  business. 
Thus  four  weeks'  grace  is  allowed  the  policyholders  in  the  pay- 
ment of  premiums,  and  reinstatement  is  usually  permitted 
within  one  year  from  the  date  of  lapse  provided  all  arrears 
are  paid  and  the  company  is  satisfied  with  the  insured's 
physical  condition.  The  "  incontestible  "  and  "  misstatement 
of  age  "  clauses  are  similar  to  those  found  in  ordinary  policies. 
It  is  also  the  general  rule  to  provide  that  the  insured  may  pay 
his  premiums  at  the  home  office  so  that,  in  case  the  agent 
should  fail  for  some  reason  to  collect  the  premium  at  the  home 
of  the  insured,  he  is  obliged  to  pay  the  same  at  either  the 
home  or  district  office  before  the  expiration  of  the  four 
weeks'  period  of  grace. 

Some  companies  give  the  insured,  in  case  he  is  dissatisfied 
with  his  contract,  the  privilege  of  surrendering  the  same 
within  two  weeks  after  its  issue  and  receiving  a  refund  of  the 
premium.  Other  companies,  again,  give  the  insured  the  op- 
tion of  converting  his  industrial  policy  into  one  on  the  ordi- 
nary plan,  provided  that  when  application  for  such  conversion 
\  is  made  the  insured  has  attained  a  stated  age  (usually  18  or 
\over),  has  paid  all  his  premiums  for  ten  or  some  other  stipu- 
l\ted  number  of  years,  and  can  offer  satisfactory  evidence  of 
insurability.  In  making  such  conversions  it  is  customary 
to  gke  the  full  legal  reserve  as  a  surrender  value  and  to  apply 
the  same  in  payment  of  premiums  on  the  ordinary  policy.  It 
is  also  interesting  to  note  that  some  of  the  companies  allow 
their  policyholders  to  participate  in  the  management  by 
voting  either  in  person  or  by  proxy;  but  the  exercise  of  this 
right  to  vote  will  necessarily  be  limited  when  it  is  realized 
that  one  company  granting  the  privilege  recently  had  over 
2,300,000  policies  in  force  and  another  nearly  13,000,000. 

Like  ordinary  policies,  industrial  contracts  contain  cash, 
paid-up,  and  extension  clauses  to  apply  in  the  event  of  lapse,, 


282        THE  PKINCIPLES  OF  LIFE  INSUEANCE 

but  cash  surrender  values  are  not  paid,  as  a  rule,  until  after 
the  policy  has  been  in  force  for  a  period  of,  say,  ten  years. 
Until  recently  most  industrial  policies  were  issued  on  the  non- 
participating  plan,  yet  the  leading  companies  followed  the 
practice  for  years  of  distributing  large  surplus  accumulations 
to  their  policyholders  in  the  form  of  voluntary  dividends, 
which  might  otherwise  have  been  paid  to  the  stockholders. 

3.  Provisions  protecting  the  company. —  As  previ- 
ously stated  both  infantile  and  adult  policies  are  limited  to 
certain  ages  as  regards  their  issue,  and  also  contain  restric- 
tions as  to  the  maximum  amount  of  insurance  that  may  be 
taken  out  at  certain  ages.     Aside  from  these  limitations,  in- 
dustrial policies  are  comparatively  free  from  the  restrictions 
frequently  found  in  ordinary  contracts,  especially  as  regards 
occupation,  residence,  military  service,  suicide,  etc.     The  com- 
panies, however,  have  found  it  desirable  to  limit  the  powers  of 
their  agents  by  incorporating  a  clause  which,  to  use  the  word- 
ing adopted  by  one  large  company,  provides  that  "no  con- 
dition, provision  or  privilege  of  this  policy  can  be  waived 
or  modified  in  any  case  except  by  an  indorsement  hereon 
signed  by  the  president,  one  of  the  vice-presidents,  the  secre- 
tary,  one  of  the   assistant   secretaries,  the  actuary,  the  as- 
sociate actuary  or  one  of  the  assistant  actuaries.     JSTo  modifi- 
cation or  change  shall  be  made  in  this  policy  except  such  as  is 
in  accordance  with  the  law  of  the  state  in  which  the  same  is 
issued.     Xo  agent  has  power  in  behalf  of  the  company  to 
make  or  modify  this  or  any  other  contract  of  insurance,  to 
extend  the  time  for  paying  a  premium,  to  waive  any  forfei- 
ture, or  to  bind  the  company  by  making  any  promise,  or 
making  or  receiving  any  representation  or  information." 

4.  Rules  relating  to  the  beneficiary. —  Except  in  the 
case  of  minors,  it  is  the  general  practice  to  require  the  bene- 
ficiary's specific  consent  to  the  insurance  before  the  same  will 
be  written.     Likewise,  policies  will  not  as  a  rule  be  issued, 
except  for  a  limited  amount,  to  non-relatives  or  others  who 
do  not  possess  an  insurable  interest  in  the  life  which  is  to  be 
insured.     "  This  means,"  to  quote  the  rule  of  a  certain  large 


INDUSTKIAL  INSUKANCE  283 

company,  "that  the  beneficiary  must  be  dependent  upon  the 
insured  for  support,  or  that  the  insured  is  indebted  to  the 
beneficiary  in  an  amount  sufficient  to  justify  the  sum  insured, 
or  that  the  beneficiary  has  some  other  substantial  pecuniary 
interest  in  the  life  insured,  or  will  be  liable  for  the  expenses 
of  the  sickness  and  burial  of  the  insured."  Importance 
should  also  be  attached  to  the  policy  requirement  that  "  the 
company  may  make  payment  either  to  the  beneficiary  above 
named,  if  living,  or  to  such  other  living  beneficiary  as  may 
be  duly  and  finally  designated,  and  recognized  by  indorsement 
hereon,  or  to  the  executor  or  administrator  of  said  insured, 
or  to  any  relative  by  blood  or  connection  by  marriage,  or  to 
any  person  appearing  to  the  company  to  be  equitably  entitled 
thereto  by  reason  of  having  incurred  expense  in  any  way  on 
behalf  of  the  insured  for  burial  or  for  any  other  purpose ;  and 
the  receipt  of  any  such  payee  shall  be  conclusive  evidence  that 
payment  has  been  made  to  the  person  or  persons  entitled 
thereto  and  that  all  claims  under  this,  policy  have  been  fully 
satisfied." 

BIBLIOGKAPHY 

DRYDEN,  JOHN  F.,  "Industrial  Insurance."     Yale  Readings  in 

Life  Insurance,  i,  382-397. 

HOFFMAN,  FREDERICK  L.,  "  Industrial  Life  Insurance,"  in  H.  P. 
Dunham's  The  Business  of  Insurance,  i,  chap.  28,  452-488. 

,   History   of  the  Prudential   Insurance    Company   of 

America.     Newark,  N.  J.,  1900. 

— — — ,   "Industrial   Insurance."     Annals   of   the   American 
Academy  of  Political  and  Social  Science,  xxvi,  103-119. 


CHAPTER  XXII 

DISABILITY  INSURANCE 

By 
BBUCE  D.  MUDGETT 

DEVELOPMENT  OF  DISABILITY  INSURANCE 

A  new  clause  has  appeared  in  life-insurance  contracts  in 
the  United  States  in  recent  years,  granting  protection  against 
the  risk  of  total  and  permanent  disability.  The  first  known 
instance  of  its  kind  appeared  on  October  16,  1896,  when  an 
American  company  issued  such  a  policy  on  the  life  of  its 
president.  Since  then  interest  in  the  clause  has  grown  so 
rapidly  that  nearly  one  hundred  and  fifty  companies  are 
now  using  it.  Insurance  against  disability  is  not  in  itself 
new.  Under  the  name  of  invalidity  insurance  it  forms  a 
prominent  feature  of  the  workmen's  insurance  laws  of  a 
number  of  European  governments,  where  protection  has  long 
been  granted  against  both  temporary  and  permanent  invalid- 
ity caused  either  by  accident  or  disease.  As  early  as  the 
eighteenth  century  invalidity  insurance  was  furnished  to 
members  of  the  mutual  aid  societies  of  Germany  and  Austria 
and  it  was  extended  rapidly  in  the  nineteenth  century  to 
many  classes  of  workers.  The  friendly  societies  of  Great 
Britain  and  the  fraternal  orders  and  labor  unions  in  the 
United  States  have  likewise  paid  disability  benefits.  With 
the  stock  companies  in  the  United  States  insuring  accident 
and  health  risks  this  sort  of  protection  has,  of  course,  held 
first  place,  but  the  value  of  accident  and  health  policies 
has  been  greatly  restricted  by  the  fact  that  these  companies 
issue  a  one-year  term  contract  and  possess  the  option,  there- 

284 


DISABILITY  INSURANCE  285 

fore,  of  refusing  to  renew  at  the  time  when  the  insured  may 
be  most  in  need  of  the  protection. 

The  incorporation  of  disability  protection  in  a  life-insur- 
ance contract  is  a  recent  innovation,  as  stated  above,  and 
marks  the  introduction  of  a  new  principle,  namely,  that  of 
permanent  protection  against  the  risk  in  question.  Further- 
more, while  the  accident  and  health  companies  insure  against 
disability  of  any  duration,  the  clause  used  in  life-insurance 
contract*  in  the  United  States  covers  only  those  cases  which 
are  both  permanent  and  total.  It  is  not,  in  itself,  therefore, 
full  and  complete  protection  against  disability,  but  a  supple- 
mentary feature  added  to  the  life  contract  to  cover  contingen- 
cies not  comprehended  in  insurance  against  death.  Perma- 
nent and  total  disability  may  endanger  the  permanence  of  a 
man's  insurance  by  cutting  short  his  income  and  making  it 
impossible  for  him  to  pay  further  premiums;  or  disability 
may  have  the  same  effect  as  old  age — the  man  being  no 
longer  a  producer  should  be  cared  for  by  his  accumulated 
capital.  While  the  occurrence  of  this  risk,  therefore,  places  a 
man  or  his  dependents  in  the  same  position  as  old  age  or 
death.,  the  regular  life-insurance  contract  furnishes  no  pro- 
tection against  it. 

The  German  insurance  companies  were  the  first  to  incor- 
porate a  disability  clause  in  their  life  contracts.  It  was  used 
there  as  early  as  1876,  and  since  1900  has  been  adopted  by 
most  of  the  leading  companies.  Two  forms  of  contract  have 
been  used,  the  first,  issued  in  connection  with  regular  term, 
life,  or  endowment  policies,  promising  to  waive  payment  of 
premiums  after  disability  or  to  mature  the  policy  and  allow 
it  to  be  paid  in  installments  over  a  period  of  from  ten  to 
twenty  years.  The  second  form  of  contract  is  a  life  annuity 
payable  from  the  time  of  disability  until  death,  purchased 
independently  of  any  insurance  policy,  and  paid  for  by  a 
single,  or  by  annual  premiums,  each  payment  creating  the 
right  after  three  years  to  an  annuity  based  on  the  age  at 
which  the  payment  is  made.  The  disability  insurance  ceases 
in  either  form  of  contract  at  age  65.  The  Eussian  companies 


286          THE  PRINCIPLES  OF  LIFE  INSURANCE 

issue  a  clause  with  participating  policies  whereby,  upon  re- 
linquishing the  right  of  participation  the  insured  may  receive 
disability  insurance  in  lieu  thereof;  and  in  case  of  disability 
premiums  cease  and  a  cash  payment  of  50  to  75  per  cent,  of 
the  amount  insured  is  paid  at  once,  the  remainder  at  death 
or  at  the  end  of  the  endowment  period.  The  disability  clauses 
used  in  the  United  States  are  modeled  closely  on  that  form 
in  Germany  which  is  incorporated  in  a  life-insurance  con- 
tract and  which  promises  to  make  the  policy  full-paid  or  to 
mature  it  when  disability  occurs.  So  generally  has  it  been 
adopted  that  on  January  1,  1912,  sixteen  years  after  its 
first  appearance,  the  companies  using  the  clause  had  on  their 
books  over  78  per  cent,  of  all  the  insurance  in  force  in  the 
United  States.  And  since  the  latter  date  this  proportion 
has  been  increased  by  the  addition  of  a  number  of  the 
larger  companies  which  had  not  previously  adopted  the 
clause. 

Reasons  for  the  Disability  Clause. — This  rapid  extension 
in  the  use  of  the  disability  clause  is  due  to  two  reasons.  One 
lies  with  the  agent;  the  other  with  the  policyholder.  The 
agent  desires  it  because  of  its  value  as  a  factor  in  competi- 
tion, while  the  insured  finds  it  a  valuable  means  of  guarantee- 
ing the  permanence  of  his  insurance  because  it  covers  a  risk 
not  contemplated  by  the  usual  life-insurance  contract.  The 
policyholder's  reason  is  fundamental,  of  course,  and  the  dis- 
ability clause  must  be  tested  ultimately  by  its  value  as  an 
insurance  measure.  This,  however,  is  probably  not  the  im- 
mediate cause  of  the  phenomenal  interest  shown  in  the  clause 
in  recent  years.  The  history  of  life  insurance  in  the  United 
States  is  written  in  the  policy  contract.  Successive  changes 
in  this  document  are  indicative  of  changing  attitudes  on 
important  insurance  questions.  For  instance,  the  payment 
of  cash  surrender  values  was  radically  opposed  by  some 
companies  until  competition  or  statute  law  required  such 
values  to  be  given;  and  when  once  it  was  found  that  these 
privileges  had  a  competitive  value,  they  were  advertised  to 
the  limit.  So  it  is  with  the  disability  clause.  It  has  been 


DISABILITY  INSURANCE  287 

bitterly  opposed  by  some,  but  wide-awake  agency  managers 
have  recognized  it  as  a  powerful  competitive  weapon.  Many 
small  companies  have  been  organized  in  recent  years  in  the 
South  and  West  and  for  a  time  have  confined  their  efforts 
to  their  immediate  localities.  Here  the  appeal  to  patronize 
home  companies  has  given  them  a  great  advantage ;  but  with 
the  normal  growth  of  their  business  they  have  found  it  neces- 
sary and  desirable  to  solicit  insurance  beyond  local  surround- 
ings and  have  come  into  competition  with  the  older  and 
larger  companies.  This  is  their  opportunity  to  exploit  a 
selling  feature  and  they  have  found  it  in  the  disability  clause. 
Of  the  companies  using  the  clause  on  January  1,  1912,  over 
78  per  cent,  have  been  organized  since  1901  and  70  per  cent, 
of  them  since  1905. 

This  motive  of  competition,  however,  is  not  sufficient  to 
guarantee  the  permanence  of  the  disability  clause  in  the  life- 
insurance  contract.  Before  agents  saw  its  business-getting 
possibilities  it  must  have  been  recognized  that  the  clause 
added  a  factor  of  real  value  to  the  insured.  The  question  is : 
Is  permanent  and  total  disability  a  risk  of  any  consequence  to 
the  average  policyholder  ?  It  will  readily  be  understood  that 
the  idea  back  of  the  clause  is  to  prevent  the  lapsing  of  a 
policy  and  the  loss  of  insurance  by  that  living  death  which 
leaves  a  man  helpless  to  continue  insurance,  if  he  is  depend- 
ent on  the  income  from  his  services,  and  in  a  condition  which 
from  his  viewpoint  justifies  the  maturing  of  his  policy,  or  at 
least  justifies  freeing  him  from  the  burden  of  further 
premium  payments. 

This  question  can  only  be  answered  statistically,  for  it  ia 
necessary  to  know  the  magnitude  of  the  risk  of  total  and 
permanent  disability.  According  to  figures  derived  from 
data  of  disability  among  fraternal  society  risks  *  the  proba- 
bility of  becoming  disabled  within  one's  life  expectancy  is  as 
follows  : 

1  MUDGETT,  BRUCE  D.,  The  Total  Disability  Provision  in  American 
Life  Insurance  Contracts,  8-10. 


288          THE  PRINCIPLES  OF  LIFE  INSURANCE 


PROBABILITY  OF 

AGE  DISABILITY  WITHIN 

LIFE  EXPECTANCY 


20  

0460 

25  

0604 

30  

0803 

35  

1080 

40  

1466 

45  

1977 

50  

2652 

55  

3573 

60  

4758 

65  

6134 

70  

7477 

In  other  words  the  chances  that  a  person  aged  20  will  be- 
come disabled  within  his  life  expectancy  are  one  in  twenty- 
five;  at  age  35,  one  in  ten;  at  age  45,  one  in  five;  at  age  55, 
one  in  three ;  and  at  age  70,  three  in  four.  These  figures  are 
based  on  actual  experience  among  fraternal  society  risks  and 
lead  to  the  conclusion  that  the  risk  of  disability  is  a  very 
considerable  one  indeed.  The  policyholder,  therefore,  has  an 
adequate  reason  for  wanting  his  life  contract  supplemented 
by  the  protection  furnished  by  the  disability  clause. 

Objections  Urged  Against  the  Disability  Clause.— While 
the  disability  clause  has  been  thus  generally  adopted  as  a 
part  of  the  life  contract  it  has  been  the  object  of  much  criti- 
cism. The  following  are  among  the  more  important  of  the 
objections  advanced : 

1.  It  is  not  life  insurance. — The  attitude  is  that 
this  is  a  risk  distinct  and  separate  from  life  insurance  and 
should  be  covered,  if  at  all,  by  a  company  organized  for  this 
specific  purpose.  It  is  quite  in  line  with  the  hazards  under- 
taken by  an  accident  or  health  company.  This  objection 
quite  disregards  the  fact  that  the  occurrence  of  permanent 
and  total  disability  may  necessitate  the  lapse  of  insurance 
that  is  badly  needed,  and  that  the  protection  offered  by  the 
accident  and  health  companies  is  one-year  insurance  which 
the  company  may  refuse  to  renew  when  the  risk  of  disability 


DISABILITY  INSURANCE  289 

becomes  great  by  reason  of  old  age  or  disease.  Eeal  dis- 
ability insurance  must  comprise  permanent  protection 
against  this  risk. 

2.  Risk  is  small  and  interval  brief  between  disability 
and  death. — The  data  on  page  288  show  the  magnitude  of 
the  risk.    At  the  younger  ages  the  chances  of  disability  are 
small  indeed,  and  the  larger  figures  for  the  older  ages  are 
due  largely  to  disability  occurring  at  an  age  covered  by  very 
few  of  the  clauses  in  existence.    Furthermore,  on  the  basis  of 
data  compiled  by  Mr.  Sidney  H.  Pipe,2  the  average  interval 
between  the  time  of  disability  and  the  time  of  death  is  found 
to  be  one  year,  four  months,  and  twenty-eight  days.     This 
objection  fails  to  recognize  the  true  function  of  insurance 
which  is  the  elimination  of  risk  and  not  protection  merely 
against  a  few  well-known  hazards.    It  is  true  that  the  figures 
quoted  show  the  risk  to  be  reasonably  small,  but  the  figures 
are  true  in  the  aggregate  only  and  in  individual  cases  the 
protection  afforded  may  be  very  important.    The  size  of  the 
aggregate  risk  is,  therefore,  not  a  real  criterion.     There  are 
many  cases,  for  instance,  where  persons  lose  both  legs  or 
arms  or  become  totally  blind  or  totally  paralyzed  and  live 
for  years.    It  is  for  these  individuals  that  the  protection  is 
important  for  there  is  no  means  in  the  ordinary  policy  con- 
tract whereby  the  insured  is  guaranteed  protection  under 
these  circumstances. 

3.  Misrepresentation  by  agents. — A  familiar  objec- 
tion is  that  agents  are  given  an  opportunity,  knowingly  or 
through  ignorance,  to  misrepresent  the  facts  and  to  claim 
more  for  the  clause  than  it  deserves ;  and  that  great  dissatis- 
faction may  result  in  later  years  when  a  company  attempts 
to  construe  its  clause  strictly.    This  is  to  some  extent  justi- 
fied, in  view  of  the  fact  that  a  few  clauses  exist,  the  only 
apparent  purpose  of  which  is  to  furnish  a  talking  point  in 
competition.     But  nearly  every  important  provision  in  the 
policy  contract  has  undergone  the  same  experience,  and  the 

2  The  Transactions  of  the  Actuarial  Society  of  America,  ii,  178. 


290          THE  PRINCIPLES  OF  LIFE  INSURANCE 

* 

failure  of  the  companies  to  meet  with  great  dissatisfaction 
is  due  to  carefully  written  clauses  and  liberal  interpretation. 
There  is  no  reason  to  believe  that  this  objection  is  funda- 
mental for  it  strikes  at  particular  clauses  rather  than  at 
disability  insurance  in  general. 

4.  Difficulty  of  defining  disability. — The  difficulty 
of  defining  disability,  like  the  last  objection,  is  largely  a 
question  of  wording  and  interpretation.     The  clause  should 
be  so  worded  as  to  include  within  the  scope  of  its  benefits 
every  legitimate  case  of  total  and  permanent  disability.    Dis- 
satisfaction will  doubtless  arise  with  those  clauses  that  have 
attempted  to  restrict  the  definition  of  disability  in  case  the 
companies  using  them  insist  on  strict  construction,  but  the 
difficulties  of  the  problem  are  at  a  minimum  as  compared 
with  the  situation  facing  accident  and  health  companies  in- 
suring  against   both   permanent   and   temporary   disability. 
The  problem  of  malingering  in  connection  with  the  determi- 
nation of  temporary  disability  offers  far  greater  difficulties 
than  does  the  question  affecting  permanent  disability  and 
yet  temporary  disability  is  invariably  covered  by  the  com- 
panies in  question. 

5.  The  lack  of  disability  statistics. — Probably  the 
most  serious  objection  advanced  against  the  adoption  of  the 
disability  clause  is  that  there  is  no  scientific  basis  for  ascer- 
taining the  risk  involved.     In  the  short  time  elapsed  since 
this  clause  first  appeared  in  an  American  life-insurance  con- 
tract there  has  indeed  been  no  opportunity  to  collect  data 
from  the  experience  of  these  companies  with  which  to  meas- 
ure the  risk  of  permanent  and  total  disability.    But  the  sub- 
ject has  recently  attracted  the  attention  of  American  actu- 
aries and  several  studies  of  the  disability  risk  in  other  fields 
have  been  made  and  presented  at  meetings  of  the  Actuarial 
Society  of  America.     German  tables  of  invalidity  based  on 
the  experience  among  railway  employees  and  data  from  the 
friendly  societies  of  Great  Britain  have  both  been  used  in 
calculating   disability   premiums   for   American   companies. 
No  actual  use  has  been  made  of  these  premiums,,  however, 


DISABILITY  INSURANCE  291 

since  it  is  felt  that  foreign  experience  may  not  be  a  fair  meas- 
use  of  the  risk  to  which  the  old-line  companies  in  the  United 
States  will  be  exposed.  More  reliable  data  for  this  purpose 
have  been  found  in  the  experience  of  American  fraternal  so- 
cieties. Tables  of  disability  and  of  mortality  among  disabled 
lives  have  been  constructed  from  the  records  of  certain  of 
the  larger  fraternal  orders,  and  the  cost  of  disability  insur- 
ance in  connection  with  the  life  contract  computed  from 
these  rates  combined  with  the  American  Experience  table  of 
mortality.  These  premiums  have  been  generally  accepted 
among  American  actuaries  as  safe,  and  as  a  fair  measure  of 
the  risk  involved  until  experience  of  the  old-line  companies 
themselves  is  available.  Indeed,  the  state  of  New  York  has 
already  adopted  one  set  of  these  rates  as  a  basis  for  the 
valuation  of  disability  contracts  there  issued.3 

THE  DISABILITY  CLAUSE  IN  PRACTICE 

There  are,  as  previously  stated,  nearly  one  hundred  and 
fifty  life-insurance  companies  in  the  United  States  which  had 
adopted  a  disability  clause  by  the  beginning  of  the  year  1915. 
In  the  brief  space  of  time  since  the  clause  first  appeared,  or 
since  it  has  come  into  general  use,  there  has  been  slight  op- 
portunity for  its  provisions  to  become  standardized  by  prac- 
tice, or  for  any  standards  to  be  set  by  state  laws.  Under  the 
pressure  of  competition,  therefore,  a  great  variety  of  clauses 
has  resulted.  They  differ  as  regards  the  restrictions  imposed 
on  their  use,  benefits  promised,  and  in  other  ways,  and  it  is  by 
a  comparison  of  these  differences  that  the  relative  merits  of 
the  several  contracts  may  be  established.  The  disability 
clause  in  practice  may  be  studied  from  four  angles,  viz:  (1) 
risks  not  covered  by  the  clause;  (2)  the  definition  of  disa- 
bility; (3)  age  and  time  limits  to  the  application  of  the 
clause;  (4)  benefits  granted. 

8  For  a  fuller  discussion  of  the  statistical  data  available  for  meas- 
uring the  risk  of  disability  see  the  author's  The  Total  Disability 
Provision  in  American  Life  Insurance  Contracts,  chap.  3. 


292          THE  PRINCIPLES  OF  LIFE  INSURANCE 

Risks  Not  Covered  by  the  Disability  Clause. — Since  the 
disability  clause  is  in  a  more  or  less  experimental  stage,  many 
companies  have  attempted  to  confine  its  use  to  those  policies 
or  those  risks  on  which  a  normal  mortality  experience  may  be 
expected.  Term  insurance  furnishes  one  of  the  mooted  ques- 
tions to-day  among  insurance  companies.  Even  among  those 
companies  which  have  sold  a  great  number  of  term  policies 
the  fear  has  arisen  that  it  may  have  been  a  mistake  and  that 
the  company  may  suffer  because  of  the  large  proportion  of 
term  insurance  which  it  carries.  As  a  probable  result  of  these 
misgivings  the  disability  clause  is  often  refused  on  term  poli- 
cies. If  the  objection  to  term  insurance  is  the  fear  of  ad- 
verse selection  or  of  a  high  mortality  as  compared  with  other 
policies,  this  objection  is  properly  corrected  in  the  premium 
charged ;  and  if  the  disability  clause  is  designed  to  guarantee 
the  permanence  of  insurance  in  case  of  total  and  permanent 
disability,  there  is  as  much  need  for  it  with  term  policies  as 
with  any  others. 

There  is,  however,  a  more  serious  objection  to  the  inclusion 
of  the  clause  in  term  policies.  Many  of  these  policies  to-day 
allow  renewal  at  the  expiration  of  the  term  at  a  higher  pre- 
mium, based  on  the  age  attained  at  the  time  of  renewal;  or 
allow  conversion  into  some  other  kind  of  policy  requiring  a 
higher  rate  of  premium,  these  privileges  being  granted  with- 
out a  new  medical  examination.  The  presence  of  a  disability 
clause  in  a  renewable-term  policy  may  require  the  company 
to  pay  the  higher  premiums  due  after  renewal,  if  disability 
occurs  shortly  before  the  end  of  the  term,  and  the  renewal 
privilege  is  exercised.  This  objection  is  likewise  easily  cor- 
rected in  the  premium  charged  for  the  disability  clause.  The 
insured  should  unquestionably  pay  the  exact  cost  of  the  privi- 
lege of  releasing  him  from  premium  payments.  Convertible 
term  policies  offer  greater  difficulties.  Such  contracts  might, 
after  disability  has  occurred,  be  converted  into  short-term, 
endowments  and  under  the  guise  of  relief  from  premium  pay- 
ments the  insured  might  thus  obtain  an  endowment  at  the 
expense  of  the  company  or  of  the  other  policyholders.  In 


DISABILITY  INSURANCE  293 

this  way  the  insured  might  convert  a  term  policy  with  a  $10 
premium  into  a  ten-year  endowment  costing  $100  per  year, 
and  by  the  terms  of  his  agreement  compel  the  company  to 
pay  the  $100  premiums.  This  would  be  equivalent  to  obtain- 
ing a  ten-year  endowment  without  paying  for  it.  The  solu- 
tion of  this  difficulty  lies,  not  in  refusing  to  issue  the  disa- 
bility clause  on  term  policies,  but  in  refusing  to  extend  the 
waiver  of  premium  benefit  after  the  conversion  of  the  policy. 

The  main  reason  for  disallowing  disability  benefits  on  joint- 
life  policies  as  is  done  by  a  few  companies,  seems  to  be  the 
difficulty  of  determining  when  the  premium  will  be  waived 
or  how  much  of  it  will  be  waived,  for  joint-life  policies  com- 
prehend insurance  against  two  or  more  lives.  The  question 
arises,  therefore,  whether  the  premium  will  be  waived  in  case 
one  insured  person  is  disabled,  or  whether  both  must  be  dis- 
abled in  order  to  obtain  this  relief.  This  problem  should 
offer  no  difficulties  to  the  actuary,  for  disability  benefits  can 
be  made  payable  under  like  circumstances  with  death  benefits. 
For  instance,  the  ordinary  joint-life  policy  matures  upon  the 
death  of  either  insured;  the  disability  benefit  could  be  paid 
upon  the  disability  of  either  insured.  But  even  these  actu- 
arial refinements  are  unnecessary  and  it  is  equally  satisfac- 
tory, as  is  done  in  some  cases,  to  waive  one-half  the  premium 
in  case  of  disability  of  one,  or  the  entire  premium  in  case 
both  persons  are  disabled. 

Women  are  ordinarily  excluded  from  the  benefits  of  the 
disability  clause.  Disability  is  usually  so  defined  as  to  mean 
inability  to  carry  on  any  occupation  for  gain  or  profit,  and 
since  women  frequently  have  no  such  occupation  they  are  not 
considered  as  acceptable  risks.  Some  companies  exclude 
them  without  exception,  and  others  make  exception  only  in 
case  of  married  women  and  women  without  occupation. 

Sub-standard  lives  are  assumed  to  be  subject  to  a  higher 
rate  of  disability  than  normal  lives  and  are  therefore  often 
denied  the  right  to  disability  benefits.  In  the  absence  of  any 
statistical  basis  to  determine  the  truth  of  this  assumption  the 
restriction  is  probably  desirable.  Persons  engaged  in  haz- 


294         THE  PRINCIPLES  OF  LIFE  INSURANCE 

ardous  occupations  are  unquestionably  in  a  select  class  that 
will  show  a  high  rate  of  disability  and  are,  therefore,  often 
refused  the  benefits  of  the  disability  clause.  Cases  of  partial 
impairment  sometimes  exist,  as,  for  instance,  where  a  person 
has  lost  a  hand,  a  foot,  or  an  eye,  and  these  are  sometimes 
made  reasons  for  refusing  the  clause.  A  better  method  would 
be  to  make  exception  of  those  cases  of  disability  affected  by 
the  partial  impairment  and  allow  the  clause  to  operate  in  all 
other  cases.  Few  of  the  foregoing  restrictions  appear  in  the 
clauses,  but  the  companies  give  their  medical  directors  full 
discretion  to  exclude  the  clause  from  any  policy  submitted  to 
them.  A  number  of  companies,  however,  have  advertised 
that  they  will  make  no  restrictions  whatever  and  will  include 
the  clause  in  any  policy  accepted  by  them. 

The  Definition  of  Disability.— The  difficulty  of  ascer- 
taining what  constitutes  total  and  permanent  disability  is  one 
of  the  main  objections  that  has  been  advanced  against  this 
clause.  Disability  may  be  defined  with  reference  to  its  effect 
upon  the  occupation  or  profession  of  the  insured  or  it  may 
be  defined  with  reference  to  the  causes  of  disability.  In 
the  first  case  the  disability  that  is  of  consequence  to  the 
insured  is  that  which  renders  him  totally  and  permanently 
incapable  of  fulfilling  the  duties  of  his  own  occupation.  An 
injury  to  the  fingers  of  a  concert  violinist,  for  instance, 
may  totally  incapacitate  him  thereafter  from  carrying  on  the 
duties  of  his'  profession  and  he  is  in  this  sense  totally  dis- 
abled. The  same  injury  would  be  of  little  consequence  to  a 
commercial  salesman.  Loss  of  speech  on  the  other  hand 
would  mean  to  the  latter  inability  to  follow  his  profession, 
but  might  scarcely  affect  the  violinist.  In  this  way  it  might 
be  shown  that  there  are  many  injuries,  diseases,  and  defects 
that  have  vastly  different  effects  on  the  earning  capacity  of 
men  in  different  occupations.  If  protection  is  to  be  obtained 
against  the  financial  consequences  of  disability  these  different 
results  must  be  considered  in  defining  the  clause  offering  such 
protection.  The  usual  form  of  definition  requires  that  "  the 
insured  shall  furnish  due  proof  that  he  has  become  wholly 


DISABILITY  INSURANCE  295 

and  permanently  disabled  by  bodily  injury  or  disease,  so  that 
he  is  and  will  be  permanently,  continuously,  and  wholly  pre- 
vented thereby  from  performing  any  work  for  compensation 
or  profit.  .  .  ."  This  definition  does  not  consider  disability 
from  the  standpoint  of  its  financial  consequences  to  the  in- 
sured. Literally  interpreted,  the  violinist  is  not  disabled  by 
an  injury  to  his  fingers,  since  he  may  now  become  a  sales- 
man. Such  interpretation  neglects  the  fact  that  transitions 
from  one  profession  to  another  are  difficult  and  sometimes 
disastrous  to  the  person  concerned.  In  spite  of  the  fact 
that  all  clauses  are  stated  in  this  way  many  companies  no 
doubt  will  not  interpret  them  with  such  severity  as  is  sug- 
gested above.  The  practice  of  liberal  interpretation  is  fol- 
lowed in  connection  with  other  features  of  the  policy  contract 
in  cases  where  fraud  and  dishonesty  are  not  present  and 
such  liberality  will  certainly  be  extended  to  the  interpreta- 
tion of  the  disability  clause. 

Disability  may  be  further  defined  with  reference  to  the 
causes  of  disability.  From  this  viewpoint  the  clause  quoted 
above  has  much  to  commend  it.  It  promises  benefits  for  disa- 
bility due  to  bodily  injury  or  disease,  and  that  bodily  injury 
and  disease  probably  cover  the  majority  of  cases  is  evident 
from  the  data  on  page  296.4  Bodily  injury  and  disease, 
therefore,  cover  all  cases  with  the  possible  exception  of  the 
last  or  miscellaneous  group,  the  composition  of  which  is  un- 
known. A  large  majority  of  clauses  define  disability  in  this 
way.  Some  add  the  following  specific  cases,  taken  probably 
from  the  contracts  of  the  accident  and  health  companies: 
"  The  entire  and  irrecoverable  loss  of  the  sight  of  both  eyes, 
or  the  severance  of  both  hands  above  the  wrists,  or  of  both 
feet  above  the  ankles,  or  of  one  entire  hand  and  one  entire 
foot/'  In  a  few  cases  specific  mention  is  made  of  deafness 
and  insanity  as  acceptable  cases  of  disability;  dumbness  is 
nowhere  referred  to,  but  is  equally  important  with  the  above. 
A  very  few  companies  agree  to  pay  benefits  upon  the  occur- 

4  The  Transactions  of  the  Actuarial  Society  of  America,  ii,  179. 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


NUMBER  OF 

CAUSE  OF  DISABILITY  CASES  PER  1,000 

TOTAL  CASES 

1.  Consumption    234.0 

2.  Paralysis    127.8 

3.  Insanity 120.0 

4.  Diseases  of  the  circulatory  system  72.7 

5.  Diseases  of  the  urinary  system 52.9 

6.  Cancer    47.3 

7.  Injury 44.0 

8.  Balance    .  .   301.3 


rence  of  disability  from  any  cause  whatsoever.  There  is  no 
doubt  as  to  the  scope  of  this  definition. 

A  few  companies  issue  clauses  that  place  limitations  upon 
the  causes  which  will  be  acceptable  for  the  payment  of  bene- 
fits. Some  of  these  restrictions  are  of  slight  consequence,  as 
the  following  examples  show:  Disability  must  not  be  due 
(1)  to  wilful  or  immoral  acts  on  the  part  of  the  insured,  (2) 
to  intoxication,  (3)  to  actual  or  attempted  violation  of  law, 
or  (4)  to  military  or  naval  service  in  time  of  war.  A  few 
clauses  refuse  to  accept  bodily  injury  as  a  cause  of  disability. 
In  the  aggregate  this  comprises  but  4.4  per  cent,  of  air  dis- 
ability according  to  the  above  data,  but  the  risk  of  accident 
disability  is,  nevertheless,  of  much  importance  to  the  indi- 
vidual. The  worst  examples  of  restriction,  however,  are 
found  in  those  few  clauses  which  pay  benefits  only  in  case 
disability  is  due  to  accidental  injury.  Disease,  which  causes 
a  large  percentage  of  all  disability,  is  not  covered,  and  protec- 
tion is  furnished  against  only  4.4  per  cent,  of  the  total  risk. 

Age  and  Time  Limits  to  the  Application  of  the  Clause. 
— A  necessary  part  of  any  disability  clause  is  that  which 
states  the  time  when  the  risk  begins,  the  circumstances  under 
which  it  remains  in  force,  and  the  time  when  it  ceases  to  be 
effective,  if  at  all.  Benefits  are  usually  promised  "  if  the  in- 
sured, while  less  than  sixty  years  of  age,  after  the  first  pre- 
mium has  been  paid  to  the  company  on  account  of  this  policy, 
shall  furnish  due  proof  to  the  company,  while  the  policy  is  in 
full  force  and  effect/'  that  he  is  disabled.  The  risk  begins 


DISABILITY  INSURANCE  297 

in  this  case  as  soon  as  one  full  annual  premium  has  been  paid. 
A  few  clauses  require  the  payment  of  two  or  even  three  pre- 
miums. This  is  equivalent  to  maintaining  a  probationary 
period  of  one  or  two  years  between  the  beginning  of  the  life 
insurance  and  of  the'  disability  insurance.  Most  clauses,  as 
the  above,  continue  the  disability  insurance  while  the  policy 
is  in  full  force  and  effect.  Some  state  that  there  must  be  no 
default  in  the  payment  of  premiums.  The  question  that 
arises  here  is  whether  in  the  event  of  the  lapse  of  the  policy 
through  default  in  premiums  the  disability  protection  stands 
on  the  same  footing  as  the  life  insurance.  Most  policies 
allow  thirty  days  of  grace  for  the  payment  of  premiums  and 
some  upon  request  by  the  insured  allow  the  premiums  to  be 
paid  automatically  thereafter  from  the  reserve.  The  question 
is,  will  the  disability  benefits  be  continued  on  the  same 
terms?  In  many  cases  there  is  no  way  of  answering  this 
question  from  the  phraseology  of  the  clause.  The  few  refer- 
ences to  the  period  of  grace  in  premium  payments,  if  definite, 
usually  continue  the  disability  insurance  during  this  time,  al- 
though cases  to  the  contrary  exist.  One  clause  gives  the 
company  the  option  of  cancellation  within  the  period  of  grace 
following  any  anniversary  of  the  contract.  The  most  liber- 
ally drawn  contracts  state  that  the  clause  operates  "  while 
the  policy  is  in  full  force  and  effect,"  as  above,  or  "  during 
the  continuance  of  the  policy.'5  This  phraseology  puts  the 
life  and  the  disability  protection  on  equal  terms. 

A  very  few  policies  limit  the  operation  of  the  disability 
clause  to  the  time  during  which  premiums  are  paid.  ^Thus 
in  a  twenty-payment  life  policy,  the  disability  insurance  lasts 
for  only  twenty  years.  This  would  be  of  no  significance  if 
the  waiver  of  premiums  were  the  only  benefit  granted,  but  the 
fact  is  in  every  instance  of  this  sort  the  policy  matures  upon 
disability  and  is  paid  in  some  form  to  the  insured.  This 
limitation  constitutes  a  serious  indictment  of  the  clauses  in 
which  it  is  found. 

In  the  clause  quoted  above  benefits  are  paid  only  where 
disability  occurs  before  the  insured  is  sixty  years  of  age. 


298          THE  PRINCIPLES  OF  LIFE  INSURANCE 

This,  or  an  equivalent,  age  limitation  is  found  in  a  large 
majority  of  these  contracts.  Thr  appears  at  first  glance  to 
be  objectionable.  The  man  who  wants  disability  insurance 
wants  protection  throughout  the  entire  period  of  his  life. 
The  main  jeason  why  the  limitation  exists  is  probably  the 
fact  that  our  actuarial  information  regarding  the  chances  of 
disability  after  age  60  is  so  imperfect  that  insurance  of  the 
risk  is  largely  guesswork.  But  there  is  a  more  fundamental 
reason  why  protection  is  not  needed  after  approximately  this 
age.  The  clause  stands  as  a  guarantee  that  the  permanence 
of  a  man's  insurance  will  not  be  endangered  by  his  becoming 
disabled.  The  "  insurance  "  period  of  life,  however,  is  the 
period  of  productivity,  and  it  does  not  extend  ordinarily  be- 
yond sixty  or  sixty-five  years  of  age.  In  other  words,  by  this 
time  the  average  man  retires  from  active  business  or  profes- 
sional life  and  his  later  years  are,  or  should  be,  cared  for  by 
the  accumulations  previously  made.  There  is  no  special 
reason,  therefore,  why  disability  insurance  should  cover  this 
later  period. 

Many  of  the  clauses  which  set  an  age  limit  have  not,  how- 
ever, left  the  insured  entirely  without  protection  during  the 
later  years.  Provision  is  made  whereby,  if  disability  occurs 
after  the  age  limit  has  been  reached,  the  premiums  thereafter 
becoming  due  will  be  allowed  to  accumulate  as  a  lien  against 
the  policy  without  interest.  This  is  a  highly  commendable 
practice.  A  few  companies  issue  clauses  to  apply  without  age 
limit. 

Benefits  Granted — Kinds  and  Amounts. — Two  classes 
of  benefits  are  ordinarily  given  by  these  clauses,  the  one  allow- 
ing the  further  payment  of  premiums  to  be  waived  without  in 
any  way  affecting  the  values  granted  in  the  insurance  con- 
tract; the  other  allowing  the  policy  to  mature  and  the  value 
to  be  paid  in  some  form  to  the  insured.  Payment  of  the  pol- 
icy may  take  one  of  three  forms:  a  fixed  number  of  install- 
ments, a  single  cash  sum,  or  a  life  annuity.  Some  clauses 
give  only  one  benefit,  others  allow  a  choice. 

In  case  the  waiver  of  premium  benefit  is  given,  its  cost  to 


DISABILITY  INSURANCE  299 

the  company  will  consist  of  the  number  of  premiums  that  will 
fall  due  between  the  time  of  disability  and  the  time  of  death. 
The  magnitude  of  the  benefit  will,  therefore,  depend  statis- 
tically on  the  average  time  elapsing  between  disability  and 
death.  From  the  only  American  data  bearing  on  the  subject 
it  appears  that  this  period  is  one  year,  four  months,  and 
twenty-eight  days  5  among  fraternal  society  risks.  Accepting 
these  data  as  being  approximately  true  for  the  old-line  com- 
panies, the  benefit  will  therefore  equal  an  average  payment  of 
two  premiums,  for  at  the  time  of  death  the  face  value  of  the 
policy  will  be  payable  in  any  case.  This  fact  explains  the 
small  cost  of  the  disability  clause. 

The  above  data  likewise  furnish  a  basis  for  estimating  the 
proper  value  that  should  be  given  where  maturity  benefits  are 
promised  and  for  comparing  this  value  with  the  values  actu- 
ally given.  If  the  average  period  between  disability  and 
death  is  one  year,  four  months,  and  twenty-eight  days,  then 
the  value  of  a  policy  at  the  time  of  disability,  scientifically 
determined,  will  be  that  sum  of  money  approximately  6  which 
with  interest  for  one  year,  four  months,  and  twenty-eight 
days  will  equal  the  face  value  of  the  policy,  say  $1,000.  If 
this  amount  were  given  as  a  maturity  benefit  it  would  be 
exactly  equivalent  to  the  waiver  of  premium  benefit  so  gener- 
ally available.  The  insured  would  hesitate  to  accept  any 
smaller  amount  except  under  the  pressure  of  urgent  necessity 
if  he  realized  this  fact  clearly.  If  the  full  face  value  of  the 
policy  were  given  at  the  time  of  disability  its  cost  to  the 
company  would  be  only  the  difference  between  $1,000  due 
now  and  the  value  now  (present  value)  of  $1,000  due  in  one 
year,  four  months,  and  twenty-eight  days,  and  no  company 
would  be  increasing  its  liability  to  unwarrantable  proportions 
by  giving  a  value  equivalent  to  $1,000  at  the  time  of  dis- 
ability. 

6  The  Transactions  of  the  Actuarial  Society  of  America,  ii,  178. 

8  precisely,  it  must  be  calculated  on  the  basis  of  the  probability 
of  death  among  disabled  persona.  The  difference  is  due  to  the  eJffect 
jtf  compounding  mt.e.re&fc. 


300          THE  PRINCIPLES  OF  LIFE  INSURANCE 

The  ordinary  installment  benefits  consist  in  the  payment 
of  specified  amounts  per  year  for  a  period  of  ten,  fifteen,  or 
twenty  years.  The  amount  is  usually  named  as  one-tenth, 
one-fifteenth,  or  one-twentieth  of  the  face  value  of  the  policy. 
The  discounted  values  of  $1,000  paid  in  ten  installments  of 
$100  each,  fifteen  installments  of  $66.67,  or  twenty  install- 
ments of  $50  on  a  3%  per  cent,  interest  basis,  are,  respec- 
tively, $861,  $795,  and  $736.  Thus  the  policyholder  sur- 
renders for  these  amounts  a  policy  that  in  less  than  one  and 
one-half  years  would  mature  for  $1,000.  By  giving  a  ma- 
turity benefit  such  as  the  above  a  company  thereby  actually 
decreases  its  liability. 

A  few  companies  have  provided  for  the  payment  of  the 
policy  as  a  continuous  installment,  that  is,  twenty  guaranteed 
payments,  and  in  case  the  insured  lives  beyond  the  period  of 
these  certain  payments,  the  same  yearly  amounts  will  con- 
tinue until  death.  Considering  the  average  life  of  a  disabled 
person,  this  continuous  feature  will  occasion  but  little  extra 
liability.  The  first  case  of  a  continuous  installment  based  on 
ten  certain  payments  appeared  in  1915. 

The  settlement  of  a  disability  contract  by  the  payment  of 
a  cash  sum  is  offered  by  a  few  companies.  The  full  amount 
insured  is  given  in  a  few  instances,  but  this  apparent  liber- 
ality is  destroyed  by  the  restrictions  under  which  the  benefit 
is  paid,  the  clauses  covering  disability  due  to  accidental  injury 
only,  and  in  some  cases  limiting  the  kinds  of  injury.  Equally 
open  to  criticism  are  clauses  which  promise  to  pay  half  the 
face  value  on  disability. 

The  payment  of  the  policy  as  an  annuity  is  allowed  in  some 
cases  after  disability,  the  payment  being  so  much  per  year 
until  death.  In  one  case  $50  per  year  is  paid;  in  another, 
$100  per  year,  but  the  latter  is  limited  to  five  payments  at 
most,  thereby  making  the  maximum  recoverable  under  this 
contract  equal  in  present  value  to  $467,  and  since  death  is 
probable  to  occur  in  one  and  one-half  years,  the  amount  re- 
ceived in  most  cases  will  be  far  less  than  $467.  Other  an- 
nuities pay  an  amount,  based  on  the  age  at  the  time  of  disa- 


DISABILITY  INSURANCE  301 

bility,  which  could  be  purchased  by  the  face  value  of  the 
policy,  but  the  death  rate  among  active  lives  is  used  in  com- 
puting this  amount  and  not  the  death  rate  among  disabled 
lives. 

Payment  of  Dividends  After  Disability. —  Most  life-in- 
surance contracts  to-day  are  participating  and  allow  the  in- 
sured to  share  at  periodic  intervals  in  any  surplus  that  has 
accrued  from  excess  interest  earnings,  or  savings  in  mortality, 
loading,  etc.  Many  policies  with  an  initial  annual  premium 
of  twenty  or  twenty-five  dollars  receive  a  return  in  dividends 
of  six,  eight,  ten,  or  more  dollars  per  year  after  the  policies 
have  been  in  force  over  twenty  years.  The  question  is,  will 
the  company  continue  to  pay  these  dividends  after  the  insured 
has  become  disabled?  The  premiums  charged  for  the  disa- 
bility clause  have  been  computed  on  the  assumption  that  the 
initial  premium  charged  will  be  waived,  and  not  this  premium 
less  dividends.  There  is  no  reason,  therefore,  why  the  in-' 
sured  should  not  continue  to  receive  dividends  on  his  policy 
after  disability  as  well  as  before.  In  spite  of  this  fact  very 
few  disability  clauses  make  any  reference  to  dividends,  and 
the  tacit  assumption  is  that  the  companies  do  not  expect  to 
pay  them  after  disability.  A  few  clauses  state  definitely  that 
dividends  will  be  paid  after  disability,  or  that  the  waiver  of 
premiums  "  shall  have  the  effect  of  providing  the  same  values 
and  benefits  as  though  premiums  waived  had  been  paid." 

Participation  in  surplus  after  maturity  of  the  policy  is  on 
a  different  basis.  The  only  element  of  surplus  in  which  the 
holder  of  a  matured  installment  policy  has  a  right  to  share  is 
surplus  interest  earnings.  If  the  amount  of  installments  is 
computed  on  a  3  per  cent,  interest  basis  and  the  company 
earns  4  per  cent.,  the  extra  1  per  cent,  is  contributed  equally 
by  all  the  assets  and  therefore  the  recipient  of  the  installments 
should  receive  1  per  cent,  of  the  funds  which  still  stand  to 
his  credit. 

Conclusion. —  The  disability  clause  represents  one  of  the 
most  recent  developments  in  the  life-insurance  contract.  Ap- 
pearing in  the  United  States  first  in  1896  and  being  unknown 


302          THE  PRINCIPLES  OF  LIFE  INSURANCE 

in  any  general  way  before  about  19 06,  the  clause  has  devel- 
oped without  precedents  to  follow  and  the  companies  have 
necessarily  faced  two  extremes  in  policy,  that  of  giving  the 
insured  a  feature  worth  while  and  that  of  giving  him  too 
much  for  the  price  paid  and  thereby  perhaps  endangering  the 
future  stability  of  the  company.  There  has  resulted  a  great 
variety  of  clauses,  as  the  preceding  pages  have  shown,  and 
an  utter  lack  of  uniformity  in  the  character  of  the  disability 
contracts  now  in  existence.  Unlike  in  the  extent  to  which 
they  apply  to  all  insured  risks,  unlike  in  their  statement  as  to 
what  constitutes  disability,  unlike  as  to  the  amount  and 
nature  of  the  benefits  they  grant,  the  clauses  now  in  use  do 
not  enable  one  to  state  what  a  standard  disability  contract 
promises  with  the  same  definiteness  that  is  possible  with 
many  other  provisions  of  the  life  contract,  such  as  surrender 
values,  reserves,  etc.  A  natural  tendency,  however,  is  already 
in  evidence  toward  the  standardization  of  these  clauses,  as  is 
shown  by  the  identical  phrasing  of  certain  parts  of  many 
clauses,  and  by  the  frequency  with  which  many  companies 
are  revising  their  clauses.  Some  companies  have  already 
revised  their  disability  contracts  three  or  four  times. 

It  is  a  dangerous  prophecy,  therefore,  to  indicate  any 
definite  direction  which  the  development  of  the  disability 
jclause  will  take  in  the  near  future.  But  each  succeeding 
change  in  the  clause  marks  an  advance  and  furnishes  the 
policyholder  with  a  more  desirable  contract.  An  illustration 
is  the  number  of  cases  where  clauses  were  issued  originally 
granting  a  waiver  of  premiums,  but  were  soon  revised  to 
permit  the  payment  of  the  policy  after  disability  in  a  speci- 
fied number  of  installments;  the  latter  contracts  in  several 
instances  have  been  again  remodeled  by  the  inclusion  of  the 
continuous  installment  feature. 

The  rapidity  with  which  the  clause  emerges  from  the  ex- 
perimental form  in  which  it  now  exists  will  probably  depend 
on  two  factors,  viz.,  the  accumulation  of  experience  by  the 
life-insurance  companies  themselves  by  which  they  will  be 
able  to  measure  its  cost  with  more  scientific  precision  than 


DISABILITY  INSURANCE  303 

at  present;  and,  second,  the  education  of  both  insurers  and 
the  insuring  public  as  to  the  economic  value  of  the  clause. 
The  first  named  factor  is  a  matter  of  time,  and  the  necessary 
experience  is  accumulating  as  more  policyholders  are  being 
insured  under  the  clause  and  as  claims  are  accruing.  The 
economic  value  of  the  clause  arises  from  the  fact,  as  previ- 
ously explained,  that  circumstances  may,  and  do,  arise  where 
a  man's  insurance  will  lapse  through  his  inability  to  earn 
an  income  and  therefore  to  pay  the  premiums  and  where 
therefore  he  will  be  in  a  condition  which  from  his  own  view- 
point justifies  the  maturity  of  his  policy  or  at  least  his  free- 
dom from  the  burden  of  further  premium  payments.  This 
latter  factor  is  fundamental  and  must  be  the  basis  of  any 
development  of  the  disability  clause  that  is  to  be  permanent. 

BIBLIOGRAPHY 

MUDGETT,  BRUCE  D.,  "The  Total  Disability  Provision  in  Amer- 
ican Life  Insurance  Contracts."  Annals  American  Acad- 
emy of  Political  and  Social  Science,  supplement,  May,  1915. 
A  study  of  the  disability  clause  in  actual  operation  in  the 
United  States.  It  analyzes  over  one  hundred  and  twenty-five 
clauses  now  in  use  and  finds  them  a  complex  of  good  and 
bad.  This  study  is  the  only  extended  one  of  the  subject  that 
has  thus  far  appeared. 


CHAPTER  XXIII 

GROUP    INSURANCE 

By 
RALPH  H.  BLANCHABD 

Group  insurance,  in  its  typical  form,  insures  the  lives  of  a 
group  of  employees  under  a  blanket  policy,  at  a  reduced  rate 
of  premium,  and  without  individual  medical  examination. 
The  earliest  known  application  of  this  plan  was  the  writing 
of  a  group  policy  by  the  first  chartered  American  life-insur- 
ance company  on  seven  hundred  coolies  during  their  trans- 
portation from  China  to  Panama.  Present-day  group  insur- 
ance, however,  is  still  in  the  earliest  stages  of  its  development, 
the  New  York  Insurance  Department  having  issued  its  first 
approval  of  a  policy  form  in  February,  1911.  Group  busi- 
ness is  at  present  written  by  only  a  small  number  of  compa- 
nies, but  it  is  probable  that  its  volume  will  increase  very 
considerably  in  the  near  future.1  Since  this  form  of  insur- 
ance is  somewhat  experimental  in  nature  and  in  no  sense 
standardized,  any  definition  or  description  must  be  qualified 
in  its  application  to  particular  cases.  In  the  following  pages 
are  pointed  out  the  essential  principles  of  this  type  of  insur- 
ance; the  practical  working  out  of  these  principles  will  vary 
from  one  company  to  another. 

The  Group. —  The  minimum  number  of  employees  which 
may  be  insured  without  medical  examination  varies  from  fifty 
to  two  hundred  and  fifty,2  and  these  must  be  carefully  in- 

1In  April,  1914,  the  New  York  Insurance  Department  had  ap- 
proved the  group  policies  of  five  companies  and  there  is  one  company 
writing  this  business  outside  of  New  York. 

2  In  Massachusetts,  Georgia,  Indiana,  Iowa,  Nebraska,  North 
Carolina,  Oklahoma,  and  Washington,  it  is  illegal  to  insure  any  life 
without  a  medical  examination. 

304 


GROUP  INSURANCE  305 

spected  and  passed  upon  as  a  group  before  they  will  be  ac- 
cepted by  the  company.  Such  matters  as  sex,  average  age, 
and  general  health  of  employees,  sanitary  construction,  up- 
keep of  the  plant,  and  other  aspects  of  the  environment  of 
the  workers  are  considered  in  determining  whether  the  group 
is  of  a  sufficiently  high  standard. 

This  inspection  performs  the  same  function  for  the  group 
as  does  a  medical  examination  for  the  individual  and  empha- 
sizes the  essential  difference  between  group  insurance  and 
insurance  of  individuals.  In  the  former  c*ase  the  group  is 
the  unit  of  the  risk  and  only  those  matters  which  affect  it 
as  a  group  should  be  considered  in  determining  its  desira- 
bility, in  the  latter  the  individual  is  the  unit.  It  is  essential 
that  the  underwriter,  in  approving  a  group,  exercise  the  same 
careful  judgment  that  is  displayed  by  the  medical  examiner 
in  approving  an  individual. 

If  these  general  conditions  are  satisfactory  each  employee 
fills  out  a  census  slip  stating  his  name,  age,  residence,  duties, 
date  of  entering  employment,  and  the  amount  of  insurance 
desired.  The  premium  necessary  to  pay  for  the  insurance  on 
each  life  is  then  computed;  and  a  premium  for  the  group 
secured,  which  is  quoted  to  the  employer.  If  the  quoted  rate 
is  satisfactory  and  the  employer  decides  to  take  out  the  insur- 
ance, each  employee  signs  a  personal  application  giving  the 
same  information  as  was  contained  in  the  census  slip.  The 
employer  files  a  general  application,  giving  a  list  of  his  em- 
ployees and  certifying  that  the  statements  in  their  individual 
applications  are  true  to  the  best  of  his  knowledge  and  belief. 

New  employees  may  be  added  to  the  group  under  the  same 
terms,  except  that  some  companies  require  a  medical  examina- 
tion. Some  companies  also  stipulate  a  certain  period  of 
employment  before  the  new  name  may  be  added.3  When  a 
member  of  the  group  withdraws  from  the  employ  of  the  firm 
his  insurance  automatically  ceases.  Several  companies  give 
him  the  privilege,  however,  of  taking  out  other  insurance  in 

3  In  Massachusetts  additional  lives  may  not  be  covered  by  the 
original  contract;  a  new  policy  is  necessary. 


306        THE  PRINCIPLES  OF  LIFE  INSURANCE 

the  company  for  an  amount  not  greater  than  that  for  which 
he  was  insured  under  the  group  plan,  at  regular  premium 
rates,  but  without  the  requirement  of  a  medical  examination. 
In  all  cases  of  additions  or  withdrawals  the  employer  must 
immediately  notify  the  insurance  company. 

The  Policy. —  The  policy  contract  is  usually  of  the  one- 
year  renewable-term  type,  subject  to  rate  adjustments  as  ex- 
plained below.  In  some  cases  five-  or  ten-year  term,  endow- 
ment, and  ordinary  life  policies  are  issued  under  the  group 
plan.  The  general  provisions  of  the  contract  covering  grace 
for  the  payment  of  premiums,  incontestability,  restrictions 
an  case  of  suicide  and  insanity,  etc.,  are  much  the  same  as  in 
regular  life  policies.  The  face  value  may  be  an  arbitrary  sum 
for  each  individual  (usually  $1,000)  or  may  be  equal  to  the 
salary  of  the  insured,  with  a  limit  of  $5,000  on  any  individual 
life.  As  stated  in  the  definition,  a  blanket  policy  is  issued 
covering  the  group.  This  policy  is  held  by  the  employer  and 
is  accompanied  by  a  register  on  which  is  recorded  the  particu- 
lars concerning  each  life  insured.  Some  companies  provide  a 
certificate  of  insurance  to  be  issued  to  each  employee.  A  du- 
plicate of  the  register  is  kept  at  the  home  office  of  the  company 
and  all  changes  in  personnel  must  be  recorded  in  both  the 
original  and  the  duplicate. 

Rates. —  The  premium  rate  for  group  insurance  is  con- 
siderably lower  than  would  obtain  if  the  lives  were  covered  in 
the  regular  way.  This  is  made  possible  by  saving  in  loading 
and  by  expected  saving  in  mortality  cost,  owing  to  the  great 
care  with  which  the  groups  are  selected.  The  commissions 
paid  for  securing  group  contracts  are  lower  and,  since  all 
companies  require  that  the  premium  be  paid  by  the  employer,* 
the  cost  of  collection  is  almost  negligible  and  the  lapse  ratio 
is  greatly  lowered.  The  cost  of  inspecting  the  plant  as  a 
whole  is  also  much  smaller  than  would  be  the  cost  of  indi- 
vidual medical  examinations.  In  one  company,  issuing  a 
participating  contract,  a  separate  department  has  been  estab- 

*  The  employer  may  make  arrangements  with  his  employees  to  de- 
duct a  part  or  the  whole  of  the  premium  from  their  wages. 


GROUP  INSURANCE  307 

lished  to  handle  its  group  business  and  distribute  the  savings, 
which  are  reflected  to  a  greater  extent  in  the  quoted  rates  of 
the  non-participating  companies.  These  latter  companies 
guarantee  their  rates  for  a  term  of  five  years,  reserving  the 
'  right  to  make  such  changes  at  the  end  of  this  period  as  their 
experience  seems  to  warrant.  The  participating  company 
guarantees  its  gross  rate  in  perpetuity,  adjustments  to  experi- 
ence being  effected  by  the  payment  of  dividends. 

Premiums  are  ordinarily  paid  monthly,  adjustments  being 
made  for  the  withdrawal  of  old  and  the  addition  of  new  em- 
ployees. One  company,,  while  covering  each  new  life  from 
the  beginning  of  employment,  makes  no  premium  charge  until 
the  beginning  of  the  following  months  and,  to  offset  this,  gives 
no  premium  credit  for  fractions  of  a  month  following  with- 
drawal. 

Mr.  H.  Pierson  Hammond,  actuary  of  the  Connecticut  In- 
surance Department,  recently  inspected  an  establishment  with 
a  view  to  considering  practically  a  concrete  example  of  group 
insurance.  The  results  of  this  inspection  have  been  described 
as  follows:  "The  employees  of  this  establishment  I  have 
used  as  a  unit  for  illustration.  The  rates  upon  which  the  cost 
for  group  insurance  is  predicated  are  those  which  have  al- 
ready been  used  similarly  in  practice.  The  amount  of  insur- 
ance in  each  case  is  one  year's  salary.  The  number  of  em- 
ployees considered  is  784,  of  which  344  are  male,  and  440 
female.  The  total  annual  payroll  is  $811,000.  The  average 
age  of  these  groups  is  about  38  and  28,  respectively.  The 
health  of  the  employees,  except  in  a  few  cases,  appeared  to  be 
exceptionally  good,  no  unusual  amount  of  sickness  having  been 
reported  among  them.  The  offices  are  light  and  well  venti- 
lated, the  building  comparatively  new,  and  the  environment 
generally  excellent.  In  the  tabulated  census  returns,  I  was 
struck  with  the  distribution  of  the  ages  of  the  male  employees 
as  contrasted  with  the  female  employees.  This  was  explained 
by  the  fact  that  the  employer  had  added  very  few  male  clerks 
recently,  but  had  taken  in  more  than  the  usual  number  of 
female  clerks.  This  tendency  was  particularly  emphasized 


308 


THE  PRINCIPLES  OF  LIFE  INSURANCE 


by  the  fact  that  a  number  of  young  women  had  been  added 
temporarily  to  the  force  to  handle  special  work  and  some  of 
these  had  been  retained  permanently  by  the  employer.  I 
have,  therefore,  presented  the  following  results  so  as  to  show 
the  information  which  was  ascertained,  in  three  groups, 
namely,  male  employees,  female  employees,  and  the  total 
group: 


MALE 
EMPLOYEES 

FEMALE 
EMPLOYEES 

TOTAL 
GROUP 

Number  of  employees  

344 

440 

784 

Average  age,  years    

38.4 

28.5 

32  8 

Yearly  salaries    

$560,800.00 

$250,920.00 

$811  720.00 

Aggregate  monthly  cost  
Aggregate  annual  cost 

1,018.89 
12  226  68 

278.06 
3  336  72 

1,296.92 
15  563  04 

Annual  cost  as  a  percentage  of 
the  payroll  

2.2 

1  3 

19 

"  The  above  figures  are  based  on  the  facts  as  presented  by 
the  employer.  A  few  of  the  male  clerks  who  have  been  em- 
ployed some  time  are  above  the  average  age  of  the  group  and 
are  drawing  salaries  in  excess  of  $2,500  per  annum.  This,  of 
course,  tends  to  raise  the  cost  of  the  particular  group  which 
was  selected. 

"  The  cost  in  the  above  example  is  based  upon  a  participat- 
ing rate.  To  show  the  results  upon  the  non-participating  basis, 
Mr.  Hammond  has  also  calculated  the  aggregate  cost  based 
upon  the  American  3  per  cent,  yearly  renewable-term  rates 
loaded  12%  per  cent,  for  commissions  and  expenses  as  fol- 
lows: 

"  Male  employees,  aggregate  annual  cost,  $9,344.06,  namely, 
1.7  per  cent,  of  the  payroll. 

"  Female  employees,  aggregate  annual  cost,  $2,555.09, 
namely,  1.0  per  cent,  of  the  payroll. 

"  Total  groups,  aggregate  annual  cost,  $11,899.15,  namely 
1.5  per  cent,  of  the  payroll." 

Benefits. —  As  pointed  out  above,  benefits  under  the  policy 
may  be  either  an  arbitrary  sum  or  dependent  upon  salary. 


GROUP  INSURANCE  309 

In  the  latter  case  rates  are  quoted  as  a  percentage  of  the 
payroll.  Under  some  policies  each  employee  is  permitted  to 
name  a  beneficiary,  under  others  his  relatives  become  entitled 
to  payment  in  a  definitely  established  order. 
.  Again,  benefits  may  be  taken  in  a  lump  sum  or  in  install- 
ments, the  latter  being  most  effective  since  the  recipient  is 
usually  inexperienced  in  financial  matters.  One  plan  offered 
increases  the  payment  from  a  burial  benefit  after  two  years' 
service  to  a  life  annuity  of  20  per  cent,  of  the  wages  after 
seven  years'  service,  installments  being  paid  for  varying 
lengths  of  time  should  death  occur  between  these  periods. 
Since  it  is  a  cessation  of  annual  income  which  is  insured 
against,  obviously  an  annual  income  is  the  most  satisfactory 
form  of  benefit.  If  the  employee  retires  on  a  pension  this 
same  plan  offers  a  life  annuity  to  his  widow  (or  in  install- 
ments to  his  children  until  they  are  eighteen  years  of  age) 
amounting  to  20  per  cent,  of  the  pension. 

Functions. —  The  usefulness  of  group  insurance  may  be 
considered  from  the  viewpoint  of  the  employer,  of  the  em- 
ployee, and  of  society.  The  employer,  by  taking  out  this 
form  of  protection,  binds  his  employees  more  closely  to  him, 
and  inculcates  something  of  the  cooperative  spirit.  If  the 
face  of  the  policy  is  made  equal  to  the  salary  list,  he  offers  a 
reward  for  continued  service.  And  all  this  is  accomplished 
at  the  extremely  low  cost  of  about  l1/^  per  cent,  of  the 
payroll.  Were  this  percentage  added  to  wages  or  sala- 
ries it  would  receive  little  attention,  but  the  fact  of  insur- 
ance for  a  substantial  sum  looms  large  in  the  eyes  of  the 
employee. 

Group  insurance  may  be  of  importance  to  the  workingman 
even  if  his  employers  do  not  pay  the  premium.  A  firm  may 
arrange  to  take  out  a  group  policy  solely  for  the  purpose  of 
enabling  its  workers  to  obtain  the  lower  rates,  thereby  pro- 
tecting their  families  at  a  minimum  cost.  In  this  case  the 
employer  assumes  the  responsibility  for  the  payment  of  pre- 
miums and  acts  as  an  accounting  agency  between  the  company 
and  the  insured. 


310        THE  PRINCIPLES  OF  LIFE  INSURANCE 

Socially,  insurance  in  groups  has  much  the  same  justifica- 
tion as  has  workmen's  compensation,  and  covers  cases  where 
the  latter  would  not  apply.  Society  demands  that  provision 
he  made  for  the  proper  wants  of  its  members  and  group  in- 
surance assists  in  providing  for  a  class  which  ordinarily  has 
little  ability  or  inclination  to  care  for  itself.  It  is  further 
socially  advantageous  in  that  it  accomplishes  its  results  at  a 
lower  social  cost  than  does  ordinary  life  insurance  or  indus- 
trial insurance,  because  of  the  reduction*  in  expenses  made 
possible. 

It  has  been  suggested  that  there  are  grave  possibilities  of 
•discrimination  in  granting  group  contracts  with  their  lower 
rates.  If  the  rates  quoted  are  so  low  as  to  be  unprofitable  and 
require  encroachment  on  the  receipts  from  other  forms  of 
insurance  they  are  obviously  discriminatory.  But  with  care- 
ful selection  and  adequate  supervision  there  is  every  reason 
for  recognizing  the  better  risk  and  the  savings  in  expenses  by 
more  favorable  premium  charges.  It  is  one  step  toward  more 
adequate  recognition  of  the  variability  of  risk  and  accurate 
adjustment  of  rates  thereto. 

BIBLIOGRAPHY 

There-  has  been  little  written  on  the  subject  of  Group  Insur- 
ance, but  the  following  articles  may  be  referred  to : 
MANSFIELD,  BURTON  M.,  "  Life  Insurance  in  Groups."    Address 
delivered   before    the    National    Convention   of   Insurance 
Commissioners  at  Spokane,  Washington,  43rd  session,  1912, 
pp.  235-243. 

ROSENFELD,  H.  L.,  "  Group  Insurance  for  Employes  of  Banks 
and  Trust  Companies."  Pamphlet  reprinted  from  Trust 
Companies,  Aug.  1912,  pp.  99-102. 

GRAHAM,  WM.  J.,  "The  Story  of  Group  Insurance."  An  ad- 
dress delivered  before  the  Life  Underwriters'  Association  of 
New  York. 


PAET  IV 

ORGANIZATION,  MANAGEMENT,  AND  SUPER- 
VISION OF  LEGAL-RESERVE  COMPANIES 


CHAPTER  XXIV 
TYPES  OF  LEGAL-RESERVE  COMPANIES 

Distinctive  Characteristics  of  Each  Type. — Life  insur- 
ance on  the  legal-reserve  plan  is  transacted  by  three  types  of 
companies,  namely,  mutual  companies,  stock  companies,  and 
mixed  companies.  Briefly  outlined,  the  essential  features 
characterizing  each  type  of  company  are  the  following : 

Stock  companies,  using  the  term  in  its  strict  sense, 
are  those  which  have  capital  stock  and  which  do  not  issue 
policies  under  which  the  insured  is  allowed  to  participate  in 
the  profits  of  the  company.  A  stock  company  is  controlled 
by  those  who  own  the  stock,  and  the  liability  of  both  company 
and  insured  is  fixed  definitely  in  the  contract.  While  the 
policyholders  possess  an  interest  in  the  reserve  accumulated 
on  their  contracts,  they  are  not  interested  in  the  surplus  of 
the  company,  all  profits  derived  from  the  business  belonging 
to  the  stockholders. 

Mutual  companies,  again  using  the  strict  meaning, 
are  those  which  have  no  capital  stock  and  therefore  no  stock- 
holders. A  mutual  company  is  composed  of  the  policyholders 
who  own  all  its  assets  and  who,  theoretically  at  least,  control 
its  management  through  some  system  of  voting.  Although 
the  well  established  mutuals  now  have  no  capital  stock  what- 
ever, it  is  usual  in  organizing  such  companies  to  start  them 
with  a  guaranty  capital,  providing  for  a  fixed  rate  of  return 
while  the  stock  is  outstanding  and  for  its  retirement  when 
the  assets  of  the  company  reach  a  certain  prescribed  standard. 
For  competitive  purposes  mutual  companies,  until  a  few  years 
ago,  issued  non-participating  policies  of  all  kinds  at  very 
low  rates.  In  recent  years,  however,  various  states  have  un- 
dertaken to  regulate  this  matter.  Thus  in  the  state  of  New 
York  they  are  permitted  by  law  to  do  a  participating  business 

313 


314        THE  PRINCIPLES  OF  LIFE  INSURANCE 

only;  while  other  companies  organized  in  the  state  must  elect 
to  do  all  their  business  either  on  the  participating  or  the  non- 
participating  plan.  Outside  companies  doing  business  in  the 
state  are  allowed  to  transact  both  classes  of  business,  but  are 
permitted  to  do  so  only  if  they  file  separate  gain  and  loss  ex- 
hibits for  each  class.  Although  non-participating  policies 
may  be  issued  by  mutual  companies,  their  business  is  almost 
entirely  a  participating  one,  the  policyholders  paying  premi- 
ums considerably  higher  than  necessary  to  meet  the  liability  of 
the  company  and  later  receiving  a  refund  (in  the  form  of 
dividends)  of  such  overcharges  as  the  company  may  find  it 
unnecessary  to  hold. 

Mixed  companies  combine  certain  features  of  both 
of  the  other  types.  While  organized  as  stock  companies,  they 
issue  policies  on  the  participating  plan,  usually  limit  the  rate 
of  dividend  to  stockholders  to  a  definite  amount,  distribute 
all  other  surplus  earnings  to  their  policyholders,  and  also 
grant  policyholders  some  voice  in  the  management  of  the  com- 
pany. Sometimes  no  limitation  is  placed  upon  the  amount 
that  may  be  paid  to  stockholders,  yet  the  issuance  of  partici- 
pating contracts  will  call  for  some  sort  of  distribution  of  sur- 
plus to  policyholders.  In  most  instances  the  existence  of 
capital  stock  in  these  companies  had  its  origin  in  the  legal 
requirement  for  a  guaranty  capital  in  organizing  the  com- 
pany, the  law,  however,  not  providing  for  the  future  retire- 
ment of  the  stock.  In  various  states  the  law,  besides  fixing 
the  maximum  return  that  may  be  paid  stockholders,  also 
provides  for  the  retirement  of  the  stock  when  the  company 
has  become  well  established. 

Comparison  of  the  Stock  and  Mutual  Plans  as  Regards 
the  Loading  of  Premiums. —  We  may  next  pass  to  a  discus- 
sion of  the  important  differences  between  the  stock  and  mu- 
tual plans  as  they  manifest  themselves  in  actual  practice.  In 
the  first  place  it  is  to  be  noted  that  the  gross  premiums  charged 
by  mutual  companies  include  a  loading  which  not  only  amply 
covers  all  expenses,  but  also  usually  includes  an  additional 
amount  to  safeguard  the  company  against  any  possible  con- 


TYPES  OF  LEGAL-RESEKVE  COMPANIES       315 

tingencies.  Then,  if  the  premium  proves  to  be  redundant,,  as 
is  nearly  always  the  case,  the  overcharge  is  returned  to  the 
policyholders  in  the  form  of  dividends,  thus  giving  them  pro- 
tection at  actual  cost.  Stock  companies,  likewise,  usually  load 
their  net  premiums,  but  the  amount  added  does  not  as  a  rule- 
even  cover  expenses,  the  company  relying  upon  excess  inter- 
est earnings  and  saving  in  mortality  to  cover  its  requirements 
for  expenses  and  contingencies.  In  actual  practice,  therefore, 
the  stock  company  charges  a  lower  rate  of  premium  on  non- 
participating  policies  than  does  the  mutual  company  on  par- 
ticipating policies.  The  stock  company  says  in  effect,  to 
quote  one  description,  "keep  the  dividend  ['of  the  mutual 
company]  in  your  pocket."  It  follows  the  plan  of  discount- 
ing the  future  —  i.e.  of  paying  its  dividends  in  advance  —  by 
charging  a  guaranteed  low  premium;  while  the  mutual  com- 
pany asks  a  higher  premium  to  start  with  and  subsequently 
refunds  the  overcharges.  In  actual  practice,  therefore,  a  com- 
parison of  the  showing  which  stock  companies  make  from  the 
standpoint  of  ultimate  cost  of  insurance  to  the  policyholder 
and  the  showing  made  by  a  mutual  company  requires  a  com- 
parison of  the  net  annual  cost  of  the  policy  in  the  two  com- 
panies over  a  series  of  years. 

The  practical  difference  in  the  matter  of  charging  premi- 
ums by  stock  and  mutual  companies  may  be  illustrated  by  the 
following  example  of  a  $10,000  policy  issued  by  a  certain 
company  some  twelve  years  ago  on  the  participating  plan 
at  a  premium  of  $281.10,  as  compared  with  a  $10,000  non- 
participating  policy  issued  at  the  same  time  and  under  the 
same  conditions  at  an  annual  premium  of  $227.  As  regards 
the  non-participating  policy,  the  annual  cost  of  the  insurance 
remains  a  constant,  namely,  $227.  As  regards  the  partici- 
pating policy,  however,  owing  mainly  to  the  accumulating 
yalue  of  the  reserve  and  the  excess  interest  earned  on  that 
increasing  value,  the  net  cost  of  the  policy  shows  a  steady  de- 
crease. Thus,  at  the  end  of  the  first  year  the  participating 
policy  paid  a  dividend  of  $43.40,  which,  when  deducted  from 
the  premium  of  $281.10,  leaves  a  net  cost  of  $237.70,  as  corn- 


316          THE  PRINCIPLES  OF  LIFE  INSURANCE 

pared  with  the  non-participating  rate  of  $227.  At  the  end 
of  the  sixth  year  the  annual  dividend  on  the  participating 
policy  had  increased  to  $54.30,  thus  giving  a  net  cost  of 
$226. 80,  or  approximately  the  same  as  the  premium  of  $227 
charged  for  the  non-participating  policy.  Thereafter  the  net 
cost  of  the  participating  policy  grows  less  each  year,  while  that 
of  the  non-participating  policy  remains  the  same. 

The  foregoing  example  is  chosen  merely  to  illustrate  the 
manner  in  which  stock  companies  discount  the  future  by 
charging  a  reduced  rate  of  premium  as  compared  with  that 
charged  by  mutual  companies,  with  the  result  that  the  non- 
participating  plan  gives  the  lower  cost  if  the  policy  continues 
in  force  for  a  considerable  number  of  years.  The  period  in 
the  life  of  the  policy  at  which  the  total  net  cost  under  the  two 
plans  will  be  equal  differs  greatly  and  naturally  depends  upon 
the  companies  used  for  purposes  of  comparison.  Much  has 
been  written  concerning  the  question  as  to  which  plan  will  give 
the  cheaper  protection  to  the  insured,  and  innumerable  ex- 
amples are  cited  to  illustrate  one  contention  or  the  other. 
The  showing  made  under  the  two  plans  will  depend  upon  the 
companies  under  consideration,  and  the  controversy  concern- 
ing the  subject  has  therefore  consisted  primarily  of  a  dis- 
cussion of  companies  and  their  managements.  It  should  be 
recognized  that  a  true  comparison  of  the  two  plans  as  regards 
the  cost  of  insurance  —  a  comparison  of  systems  and  not  of 
companies  —  requires  that  the  companies  used  for  illustrative 
purposes  should  operate  under  precisely  the  same  conditions, 
that  their  managements  should  have  equal  ability  and  integ- 
rity, that  they  should  do  approximately  the  same  amount  of 
business  yearly,  and  that  their  policies  should  be  alike  in  their 
provisions.  Having  in  mind  a  comparison  of  systems,  as  dis- 
tinguished from  companies,  it  may  be  said  that  in  mutual 
insurance,  if  efficiently  and  honestly  conducted,  all  of  the 
overcharges  are  refunded  to  the  policyholder  and  he  receives 
his  protection  at  actual  cost,  whereas  under  the  stock  plan  an 
overcharge  in  the  premium  reverts  to  the  benefit  of  the  stock- 
holders. 


TYPES  OF  LEGAL-RESERVE  COMPANIES        317 

Arguments  Urged  in  Favor  of  Each  of  the  Plans  for 
Charging  Premiums. —  The  argument  most  frequently  urged 
in  favor  of  stock  company  rates  is  that  they  are  low,  definite 
in  amount  and  time  of  payment,  and  eliminate  all  element  of 
uncertainty,  thus  enabling  the  policyholder  to  know  the  exact 
future  cost  of  his  insurance  and  to  make  provision  therefor 
in  much  the  same  way  as  he  does  for  his  rent,  mortgage  inter- 
est, or  any  other  fixed  obligation.  In  the  words  of  one  sup- 
porter of  stock  companies,  insurance  policies  issued  on  the 
non-participating  plan  are  "  plain  business  contracts  which 
tell  their  whole  story  upon  their  face ;  which  leave  nothing  to 
the  imagination ;  borrow  nothing  from  hope ;  require  definite 
conditions,  and  make  definite  promises  in  dollars  and  cents."  1 
Another  statement  is  to  the  effect  that  "  the  policyholder  of 
a  stock  company  knows  just  what  his  insurance  will  cost,  now 
and  in  the  future,  everything  being  guaranteed  —  a  thing  im- 
possible in  a  mutual  company  for  the  reason  that  one  cannot 
know  in  advance  what  future  dividends  will  be,  or  even  that 
there  will  be  any  dividends  at  all."  2  It  is  further  argued 
that  under  the  stock  plan  the  self-interest  of  the  stockholders 
will  secure,  as  well  as  any  other  system,  a  faithful  manage- 
ment of  the  funds  accumulated  by  the  company  for  the  bene- 
fit of  its  policyholders,  and  that  the  competition  of  other 
stock  and  mutual  companies  will  keep  down  the  cost  of  insur- 
ance to  a  fair  basis.  Stockholders,  it  is  asserted,  will  be  actu- 
ated by  self-interest  to  select  the  ablest  management,  and  in 
attempting  to  do  this  will  not  be  interfered  with  by  the 
policyholders. 

In  favor  of  the  mutual  plan  it  is  argued  that  there  are  no 
dividends  to  be  paid  to  stockholders,  that  insurance  is  given 
at  actual  cost  by  returning  in  dividends  all  unnecessary  over- 
charges, and  that  the  affairs  of  the  company  may  be  con- 
trolled by  the  policyholders  in  such  manner  as  they  deem  best 

1  CRAIG,  JAMES  M.,  "  Stock  Life  Insurance,"  in  Howard  B.  Dun- 
ham's The  Business  of  Insurance,  i,  506. 

3 DEXTER,  GEORGE  T.,  "Mutual  Life  Insurance,"  in  Dunham's  The 
Business  of  Insurance,  i,  501. 


318        THE  PKINCIPLES  OF  LIFE  INSURANCE 

for  their  interests.  It  is  also  pointed  out  that  by  charging 
higher  premiums  the  mutual  company  possesses  an  important 
source  of  strength  against  periods  of  financial  stress  or  other 
unforeseen  contingencies.  Stock  companies,  on  the  contrary, 
are  not  in  a  position  in  case  of  reverses  to  call  upon  their 
policyholders  for  additional  contributions  to  meet  losses,  since 
the  stockholders,  being  alone  entitled  to  profits,  must  also 
bear  all  losses.  Strength  and  safety  are  regarded  as  first 
considerations  in  life  insurance,  and  in  this  respect  it  is  im- 
possible to  foretell  the  contingencies,  such  as  wars,  epidemics, 
greatly  declining  interest  rates,  oppressive  legislation  and 
taxation,  inefficient  management,  etc.,  which  may  arise  in  the 
distant  future ;  hence  the  danger  of  companies  assuming  fixed 
obligations  which  run  for  many  years  and  must  be  fulfilled 
absolutely  without  the  company  possessing  the  right  of  with- 
drawal or  modification.  In  practice,  however,  both  types  of 
companies  usually  retain  a  considerable  fund  for  emergencies 
so  that  the  argument  is  applicable  only  in  the  event  of  very 
unusual  contingencies.  Furthermore,  the  argument  that  cer- 
tain stock  companies  possess  a  much  greater  accumulated  sur- 
plus than  certain  mutuals  is  considered  by  the  supporters  of 
the  mutual  plan  to  constitute  nothing  more  than  "  the  dis- 
cussion of  the  merits  of  companies  and  not  of  systems ;  just  as 
would  be  the  case  if  it  were  pointed  out  that  the  capital  of 
most  stock  companies  is  so  inconsiderable  as  to  be  negligible 
jn  the  nature  of  security."  3 

The  Stock  and  Mutual  Plans  Compared  with  Reference 
to  the  Control  of  Companies.— The  control  of  stock  com- 
panies, as  we  have  seen,  rests  with  the  stockholders,  generally 
by  means  of  proxy  voting.  Nearly  always  a  majority  vote 
carries  with  it  complete  control,  although  in  some  instances 
the  minority  is  able  to  secure  some  representative  in  the  com- 
pany's management  through  a  system  of  cumulative  voting. 
Control  of  mutual  companies,  on  the  contrary,  rests  in  theory 
at  least  with  the  policyholder.  All  such  companies  allow 

s  DEXTER,  GEORGE  T.,  "  Mutual  Life  Insurance  "  in  Dunham's  The 
Business  of  Insurance,  i?  500. 


TYPES  OF  LEGAL-RESERVE  COMPANIES       319r 

their  policyholders  to  express  their  will  by  attending  the  meet- 
ings and  voting  in  person.  But  it  is  clear  that  in  the  case  of 
a  large  company  doing  business  throughout  the  country  it  is 
impossible  for  more  than  a  few  of  the  total  number  of  policy- 
holders  to  attend  in  person,  hence  in  nearly  all  companies  the 
proxy  system  is  employed  in  one  form  or  another.  Some- 
times the  proxies  are  good  until  revoked,  while  in  other  in- 
stances they  are  good  only  for  the  given  meeting  or  for  a 
limited  period.  Sometimes  no  member  is  allowed  to  vote 
proxies  for  more  than  a  certain  designated  amount  of  insur- 
ance, like  $100,000;  while  in  other  instances  no  limitation  is 
imposed.  In  still  other  instances  direct  voting  by  mail  is 
permitted. 

The  foregoing  distinction  between  control  of  companies  by 
stockholders  and  by  policyholders  has  not  proved  of  much  im- 
portance in  the  past.  In  either  case  experience  has  demon- 
strated that  the  company  is  usually  controlled  by  a  limited 
number  of  persons,  and  that  the  situation  with  respect  to  a, 
large  mutual  life-insurance  company  is  similar  to  that  pre- 
sented by  other  large  corporations  with  thousands  of  stock- 
holders widely  scattered.  Experience  has  clearly  shown 
that  very  few  policyholders  attend  the  meetings,  and  that 
proxies  can  usually  be  obtained  in  sufficient  numbers  by  those 
who  are  interested  in  controlling  the  company.  The  average^ 
policyholder  seems  to  manifest  little  interest  in  the  manage- 
ment of  the  company  in  which  he  is  insured,  and,  especially 
in  view  of  the  stringent  regulation  of  the  business  by  the' 
state,  makes  little  effort  to  keep  himself  informed.  The  great 
majority  of  policyholders,  moreover,  even  if  desirous  of  at- 
tending the  meeting  or  of  expressing  an  independent  judg- 
ment by  proxy,  are  not  sufficiently  well  informed  to-day  to 
vote  intelligently  on  important  matters  that  may  come  up 
for  decision.  Even  when  attempts  have  been  made  to  organ- 
ize groups  of  policyholders  in  local  associations  with  a  view 
to  bringing  their  influence  more  effectively  to  the  attention 
of  the  company's  management,  the  efforts  have  in  nearly  all 
instances  met  with  little  success 


320          THE  PRINCIPLES  OF  LIFE  INSURANCE 

Arguments  Urged  in  Favor  of  Each  of  the  Plans  of 
Control. —  The  control  of  stock  and  mutual  life-insurance 
companies  has  been  the  subject  of  as  much  controversy  as 
was  noted  to  exist  with  reference  to  the  cost  of  protection 
under  the  two  plans,  and  innumerable  instances  have  been 
cited  pro  and  con  to  support  one  or  the  other  contention. 
The  supporters  of  the  stock  plan  point  especially  to  the  lack 
of  interest  which  policyholders  show  in  the  management  of 
mutual  companies,  that  they  rarely  vote,  and  that  the  existing 
management  may  easily  obtain  a  sufficient  number  of  proxies 
to  perpetuate  its  control.  They  assert  that  the  difference  is 
in  reality  only  a  theoretical  one  and  that  the  self-interest 
of  stockholders,  since  their  own  investment  is  at  stake, 
is  a  guaranty  that  the  company  will  be  successfully  man- 
aged. 

While  admitting  that  few  votes  are  cast  in  most  mutual 
elections,  those  who  favor  the  mutual  plan  assert  that  "life 
insurance  is  essentially  mutual  in  principle,"  and  that  con- 
trol by  policyholders,  although  it  may  not  generally  be  exer- 
cised, nevertheless  means  that  the  members  of  the  company 
possess  the  final  power  to  express  their  will  in  the  event  of  a 
grave  crisis  arising  in  the  affairs  of  the  company.  They  also 
point  to  the  threefold  danger:  (1)  of  allowing  a  stock-con- 
trolled company  to  issue  both  participating  and  non-partici- 
pating policies,  a  plan  which  may  make  possible  the  fraudu- 
lent treatment  of  participating  policyholders  to  the  advantage 
of  the  stockholders;  (2)  of  having  all  the  assets  of  a  company, 
including  not  merely  the  capital  stock,  but  the  reserve  ac- 
cumulations in  which  the  policyholder  is  vitally  interested, 
come  absolutely  under  the  control  of  a  limited  number  of 
stockholders  without  the  possibility  of  withdrawal  by  the  in- 
sured except  at  a  great  financial  sacrifice  or  at  the  risk  of  being 
unable  to  obtain  insurance  elsewhere;  and  (3)  of  possibly 
placing  the  assets  of  the  company  within  the  power  of  un- 
scrupulous financiers  who  are  interested  in  controlling  the 
company  for  purposes  totally  at  variance  with  the  best  inter- 
ests of  the  policyholders.  Again,  they  argue,  what  assurance 


TYPES  OF  LEGAL-RESERVE  COMPANIES         321 

is  there  that  a  good  management  for  the  present  will  not  be 
replaced  in  later  years  by  an  inefficient  or  even  dishonest 
one? 

When  such  conditions  arise  the  stock  plan,  so  the  sup- 
porters of  the  mutual  plan  assert,  gives  the  policyholders  no 
opportunity  to  express  their  disapproval  effectively;  nor  may 
even  the  larger  number  of  stockholders  be  able  to  effect  a 
change  since  the  controlling  interest  in  the  stock  may  be 
lodged  in  the  hands  of  one  or  a  few  individuals  whose  inter- 
ests are  furthered  by  the  practices  to  which  the  policyholders 
and  minority  stockholders  are  opposed.  Under  the  mutual 
plan,  however,  if  the  company's  affairs  become  so  bad  as  to 
arouse  general  dissatisfaction,  it  is  possible  to  oppose  the 
management  with  independent  nominations.  To  accomplish 
this  purpose  various  states  have  enacted  laws  which  aim  to 
give  policyholders  every  possible  facility  for  exercising  their 
voting  power  if  they  so  desire.  The  mere  knowledge  that  the 
body  of  policyholders  possesses  this  final  voting  power,  it  is 
felt,  will  restrain  a  management  from  going  to  the  extremes 
that  it  might  have  no  hesitancy  in  doing  if  it  were  in  a  posi- 
'tion  to  perpetuate  itself  by  virtue  of  a  majority  control  of 
the  company's  stock. 

The  Control  of  Mixed  Companies.— Mixed  companies, 
or  those  which  are  organized  as  stock  companies  but  which 
allow  the  insured  to  participate  to  some  extent  in  the  surplus 
and  grant  them  some  measure  of  voting  power,  do  not  pos- 
sess any  great  advantage  over  pure  stock  companies  as  regards 
control  by  policyholders.  An  examination  of  the  various 
plans  now  in  existence  gives  abundant  evidence  of  this  fact. 
A  few  permit  stockholders  only  to  vote  for  directors;  while  a 
considerable  number,  although  allowing  stockholders  to  vote 
in  person  or  by  proxy,  require  policyholders  to  vote  in  person, 
and  in  various  instances  still  further  limit  control  by  the 
insured  by  restricting  the  voting  power  to  those  who  carry  a 
certain  amount  of  insurance,  like  $5,000,  or  pay  a  certain 
annual  premium,  like  $75  or  $100.  Such  restrictions  will 
amply  safeguard  the  management  against  a  loss  of  control 


322        THE  PEINCIPLES  OF  LIFE  INSURANCE 

through  the  action  of  the  company's  policyholders,  since  it  is 
practically  certain  that  the  number  carrying  $5,000  of  insur- 
ance who  will  appear  to  vote  in  person  will  never  even  ap- 
proximate the  number  of  shares,  to  each  of  which  a  vote  is 
given.  Various  other  restrictions,  sometimes  used  in  con- 
junction with  those  already  mentioned  but  at  other  times 
constituting  the  only  restrictions,  may  also  be  mentioned. 
Thus,  it  may  be  provided  that  one-half  of  the  directors  shall 
be  elected  by  the  stockholders  and  the  other  half  by  the 
members,  or  that  the  stockholders  shall  elect,  say  two-thirds 
of  the  directors,  and  the  policyholders  one-third.  Again 
it  is  quite  common  to  provide  that  only  stockholders  owning 
a  designated  number  of  shares  may  be  directors,  while  in  a  lim- 
ited number  of  instances  only  may  directors  be  either  stock- 
holders or  members.  Under  such  restrictions  only  half  the 
board  with  the  president  is  needed  for  control  on  the  part  of 
the  management,  while  if  the  stockholders  are  entitled  to  elect 
more  than  half  of  the  directors,  the  voting  privilege  extended 
to  policyholders  is  apt  to  be  worthless. 

The  methods  adopted  by  mixed  companies  for  allowing  the1 
insured  to  participate  in  the  profits  of  the  company  also- 
differ  greatly  in  their  details.  Usually  the  dividend  on  the 
stock  is  limited  to  7  or  10  per  cent,  per  annum,  or  to  this 
rate  plus  a  certain  proportion  of  the  remaining  surplus,  such 
as  one-fifth  or  one-eighth.  In  at  least  one  instance  the  inter- 
est of  the  policyholders  in  the  profits  of  the  company  shall 
be  "  as  hereafter  provided,  unless  otherwise  expressly  agreed 
between  the  company  and  the  insured/'  Another  company 
limits  the  return  on  the  stock  to  7  per  cent,  plus  the  profits 
on  non-participating  business;  while  a  few  others  place  no 
limit  upon  the  stock  dividends,  yet  have  been  paying  large 
dividends  to  policyholders.  Provision  for  retiring  the  stock 
seldom  exists,  and  where  such  provision  has  been  made  it  is 
usually  stated  that  the  retirement  shall  occur  only  when  it 
is  voted  by  the  members  and  that  a  certain  proportion  of 
the  surplus,  like  one-fourth,  may  be  applied  for  that  pur- 
pose. 


TYPES  OF  LEGAL-RESERVE  COMPANIES      323 

BIBLIOGRAPHY 

CRAIG,    JAMES    M.,    "  Stock    Life   Insurance,"    in   Howard   P. 

Dunham's  The  Business  of  Insurance,  i,  503-512. 
DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  113-146. 
DEXTER,  GEORGE  T.,  "  Mutual  Life  Insurance,"  in  Howard  P. 

Dunham's  The  Business  of  Insurance,  i,  489-502. 
ZARTMAN,  LESTER  W.,  "  Control  of  Life  Insurance  Companies." 

Yale  Readings  in  Insurance,  Life,  i,  299-311. 


CHAPTER  XXV 
ORGANIZATION  OF  COMPANIES 

HOME  OFFICE  ORGANIZATION 

In  many  respects  the  organization  of  a  life-insurance  com- 
pany is  similar  to  that  of  other  corporations  which  are  con- 
cerned with  the  collection,  investment,  and  disbursement  of 
funds.  It  is  the  purpose  of  this  chapter  to  outline  the  more 
important  official  positions,  committees,  and  departments  of 
the  average  large  life-insurance  company,  and  to  describe 
briefly  their  respective  functions  and  duties.  In  doing  this  it 
is  recognized  that  the  various  companies  present  many  differ- 
ences in  their  organization.1  Generally  speaking,  the  average 
large  life-insurance  company,  aside  from  the  numerous  office 

1  In  his  excellent  lecture  on  "  Office  Organization  in  Life  Insur- 
ance" (Yale  Insurance  Lectures,  i,  112-125),  Mr.  John  B.  Lunger 
presents  in  schedule  form  the  organization  of  the  average  large  life- 
insurance  company.  His  schedule  is  herewith  reproduced.  Since 
this  chapter  aims  to  discuss  only  the  more  important  official  posi- 
tions, committees  and  departments,  Mr.  Lunger's  description  of  the 
duties  of  the  other  departments  and  committees  is  given  briefly  un- 
der the  respective  headings.  Mr.  Lunger's  schedule  is  the  following: 

Bdard    of    Directors 


Committees    of    the 
Board   ..........  [General    Conduct 

Officials    Charged    with    Executive  f££i 


Treasurer 


Officials  Charged  with  Administra- 

tive  Functions    ................  [Superintendent  of  Agents 


Officials     Charged     with     Advisory  f  Director 

Functlons  .....................  [Counsel 

324 


ORGANIZATION  OF  COMPANIES  325 

departments  and  special  committees  which  handle  the  routine 
and  technical  work  of  the  company,  is  managed  by  four  groups 
of  officials:  those  who  compose  the  deliberative  bodies,  those 
who  exercise  executive  functions,  those  who  are  intrusted 

OFFICE  DEPARTMENTS: 

Agency 
Financial 
Actuarial 
Medical 
Legal 

Bookkeeping  Where  all  of  the  company's  financial  opera- 
tions are  summarized  and  classified. 

Auditing  Where  the  company's  receipts  and  disburse- 
ments are  checked  and  passed  upon  by  com- 
petent accountants. 

Claims    Where  all  proofs  of  death  are  examined  and 

passed  upon,  also  all  papers  relating  to  ma- 
turing endowment  policies  and  other  contract 
obligations. 

Real-estate  Loans  . . .  Where  all  applications  for  mortgages  are  con- 
sidered, the  value  of  property  appraised, 
and  if  the  loan  is  made,  records  are  kept  of 
all  payments  of  principal  and  interest. 

Policy- writing    Which  takes  the  applications  which  have  been 

approved  by  the  medical  department  and  pre- 
pares and  registers  the  policies  applied  for. 

Policy    Loans    Which  looks  after  the  requests  of  policyhold- 

ers  for  cash  advances  on  the  security  of  their 
policies. 

Inspection    Which  supplements  the  work  of  the  medical 

department  by  making  inquiry  concerning  the 
habits  and  financial  standing  of  applicants. 

Policyholders'  Bu- 
reau     Which    looks    after    all    communications    and 

queries  from  policyholders,  formulates  ways 
and  means  of  keeping'  them  posted,  and  looks 
after  delinquent  policyholders. 

Editorial    and    Ad- 
vertising    Which  is  charged  with  the  company's  periodi- 
cals, circulars,  all  printed  matter  for  the  use 
of  agents,  and  the  company's  general  and  spe- 
cial advertising. 


326        THE  PKINCIPLES  OF  LIFE  INSUEANCE 

with  administrative  duties,  and  those  who  serve  in  an  advisory 
capacity. 

The  Board  of  Directors  and  the  Committees  Chosen 
from  Its  Membership. —  The  board  of  directors  and  the  sev- 
eral committees  of  the  board  constitute  the  deliberative 
bodies.  In  a  mutual  company  the  directors  are  elected  by 
the  policyholders  from  among  their  own  number,  while  in  a 
stock  company  they  are  elected  by  the  stockholders  and  in 
order  to  quality  must  be  the  owners  of  a  designated  number 
of  shares.  In  mixed  companies,  as  we  have  seen,  the  di- 
rectors are  sometimes  elected  by  the  stockholders  alone,  some- 
times a  certain  number  are  elected  by  the  stockholders  and 
the  others  by  the  policyholders,  and  in  still  other  instances 
both  stockholders  and  policyholders  elect  all  the  directors  and 
may  choose  the  same  from  either  the  stockholders  or  policy- 
holders.  But  whatever  the  method  of  election,  the  board  pos- 

Supply     Which  takes  care  of  the  printed  matter  of  the 

company  and  distributes  it  in  the  home  office 
and  to  the  agencies  in  the  field.  It  is  often 
supplemented  by  a  printing  plant. 

Mail    Which  opens  all  incoming  mail  and  distributes 

it  amongst  the  offices  of  the  company  and  the 
various  departments.  Also  collects,  makes  up 
and  addresses  all  out-going  mail. 

Filing    Which    systematically   stores   applications   for 

contracts,  cancelled  contracts,  letters,  and  the 
replies  thereto,  books  and  cards  no  longer  in 
use,  and  all  of  the  many  receipt  forms  and 
papers  which  it  is  necessary  to  preserve. 

COMMITTEES    OF  OFFICIALS   AND  CHIEFS   OF   DEPARTMENTS : 

Agency  Methods 

and  Conduct  Composed  of  the  chief  of  the  Agency  Depart- 
ment and  his  leading  assistants.  It  considers 
the  forms  and  terms  of  agency  contracts,  ques- 
tions as  to  the  amount  of  business  to  be  writ- 
ten in  various  sections  of  the  country,  the 
efficiency  of  the  management  of  state  and  local 
agencies,  and  ways  and  means  for  increasing 
the  agency  organization,  and  for  the  better  in- 
struction of  agents. 


OKGANIZATION  OF  COMPANIES  327 

sesses  complete  supervisory  powers  over  the  company.  It  is 
not  only  empowered  to  select  the  president  and  other  principal 
officers,  but  may  delegate  to  them  such  powers  as  it  sees  fit. 
It  also  meets  at  stated  intervals  to  approve  or  disapprove  the 
findings  of  committees,  and  to  consider  and  pass  judgment 
.upon  all  important  matters  concerning  the  general  business 
•  conduct  of  the  company.  Since  the  transactions  of  a  life- 
insurance  company  assume  a  great  variety  of  forms,  it  is 
msually  considered  desirable  that  the  directorate  should  be 
composed  of  men  who  represent  various  callings  and  possess 
wide  experience. 

To  expedite  the  proper  fulfillment  of  its  functions,  and  to 
bring  its  members  into  close  touch  with  the  business  affairs 
of  the  company,  the  board  divides  itself  into  a  number  of 
standing  committees.  These  committees  vary  in  the  different 
companies  but  usually  are  six  in  number :  the  executive  corn- 
Review  Composed  of  representatives  of  the  medical, 

actuarial,  and  agency  departments.  It  consid- 
ers and  passes  upon  the  applications  concern- 
ing the  acceptance  of  which  there  is  a  reason- 
able doubt. 

Clerical  Efficiency. .  .Made  up  amongst  the  heads  of  departments. 
It  examines  applicants  for  positions,  passes 
upon  their  qualifications,  reports  the  outcome 
to  one  of  the  leading  officials,  and  is  expected 
to  keep  track  of  progress  made  by  new  ap- 
pointees. 

(Claims     Sometimes  composed  of  members  of  the  board 

of  directors,  but  more  usually  is  made  up  from 
the  officers  and  heads  of  departments.  It 
passes  judgment  upon  all  claims  upon  the 
company,  especially  those  concerning  the  legal- 
ity or  sufficiency  of  which  there  is  reasonable 
doubt. 

Office  Methods   and 

Systems  It  states  and  adapts  to  the  company's  pur- 
poses all  improved  and  simplified  office  meth- 
ods, examines  and  passes  upon  new  forms, 
cards  and  registers,  and  regulates  the  work  of 
each  department  so  that  it  will  fit  smoothly 
into  the  work  of  every  other  department. 


328          THE  PRINCIPLES  OF  LIFE  INSURANCE 

mittee  and  those  on  finance,  general  conduct,  claims,  agencies 
and  accounts.  Of  these  the  executive,  finance  and  general 
conduct  committees  rank  as  most  important,  while  in  certain 
instances  the  duties  embraced  under  the  headings  of  claims, 
agencies  and  accounts  are  relegated  to  special  office  depart- 
ments or  to  committees  composed  of  administrative  officials 
and  chiefs  of  departments.  The  executive  committee,  con- 
sisting of  the  president  and  certain  members  of  the  board,  has 
for  its  purpose  the  consideration  and  ratification  of  such  mat- 
ters as  bear  a  vital  relation  to  the  general  business  policy  of 
the  company.  The  finance  committee,  consisting  of  the 
president  and  treasurer  of  the  company  and  a  certain  number 
of  the  directors,  exercises  a  supervisory  control  over  the  com- 
pany's investments.  It  is  this  committee  which  approves  or 
rejects  the  investments  selected  by  the  treasurer,  and  in  order 
to  avoid  any  mistakes  in  this  important  matter  it  is,  as  Mr. 
Lunger  states,  "  a  common  rule  that  no  investment  shall  be 
made  unless  it  meets  with  unanimous  approval."  The  com- 
mittee on  general  conduct  consists  usually  of  a  certain  num- 
ber of  the  directors  and  the  chief  administrative  officers.  As 
summarized  by  Mr.  Lunger,  it  "  regulates  the  expenses  of 
the  company,  considers  the  reports  of  the  chiefs  of  adminis- 
trative and  supervisory  departments  and  of  the  office  com- 
mittees. It  is  expected  to  keep  in  touch  with  and  pass  judg- 
ment upon  all  matters  of  practical  administration  that  can- 
not be  brought  before  the  executive  committee  of  the  board. 
In  brief,  it  is  the  committee  that  observes  the  workings  of 
the  machinery  and  takes  care  that  each  part  is  in  condition 
to  work  smoothly." 

Officials  Exercising  Executive  Control. —  These  usually 
comprise  the  president,  one  or  more  vice-presidents,  each  of 
whom  has  charge  of  a  department,  and  the  treasurer.  The 
president  is  usually  intrusted  by  the  board  of  directors  with 
large  executive  powers,  and  should  not  only  be  well  versed 
in  financial  matters  but  should  have  a  wide  experience  in  the 
life-insurance  business  so  as  to  interpret  properly  the  results 
attained  in  the  respective  departments  of  the  company,  advise 


ORGANIZATION  OF  COMPANIES  329 

the  board  of  directors  in  supervising  the  general  business 
conduct  of  the  company,  determine  the  best  policy  for  it  to 
pursue,  and  direct  the  work  of  the  subordinate  officials.  He 
is  also  intrusted  with  the  duty  of  selecting  subordinate  of- 
ficials and  departmental  heads.  The  several  vice-presidents, 
each  of  whom  usually  has  charge  of  a  leading  department  of 
the  company,  must  also  keep  in  touch  with  the  general  business 
operations  of  the  company  so  as  to  be  in  a  position  to  assist 
the  president  in  his  duties,  to  assume  his  responsibilities  (or 
that  of  a  ranking  vice-president)  during  his  absence,  and  to  be 
prepared  to  assume  the  office  in  the  event  of  promotion. 

The  treasurer,  besides  passing  on  the  merits  of  the  com- 
pany's investments  so  that  those  which  meet  his  approval  may 
be  presented  to  the  finance  committee,  is  usually  the  custodian 
of  the  bonds,  stocks  and  other  investments  held  by  the  com- 
pany, and  is  intrusted  with  the  duty  of  collecting  the  interest 
and  dividends  thereon.  To  invest  the  company's  money  in 
securities  that  are  safe  and  yet  will  yield  a  return  from  1 
to  1%  per  cent,  higher  than  the  rate  assumed  for  premium 
and  reserve  computations  requires  skill  and  a  wide  knowledge 
of  the  various  classes  of  investments  in  which  life-insurance 
companies  are  permitted  to  invest  their  funds.  Great  care 
must  be  exercised  especially  with  regard  to  investments  in 
real-estate  mortgages  since  these  involve  a  knowledge  of 
values,  the  character  of  the  mortgagor,  and  an  examination 
of  the  mortgages  and  abstracts  of  title.  As  previously  stated, 
life-insurance  investments  also  consist  to  a  large  and  increas- 
ing extent  of  policy  loans,  whose  sole  security  is  the  value  of 
the  policy  against  which  the  loan  is  effected.  Since  real- 
estate  and  policy  loans  constitute  so  large  a  proportion  of  the 
total  investments  in  life  insurance,  it  is  common  for  large 
companies  to  have  two  special  departments  —  a  real-estate 
department  and  a  policy-loan  department  —  to  manage  and 
supervise  the  same. 

Officials  Intrusted  with  Administrative  Functions. — 
These  are  usually  the  comptroller,  secretary  and  superintendent 
of  agents.  The  comptroller  is  charged  with  the  responsibility 


330        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

of  overseeing  the  company's  bookkeeping  and  of  collecting 
premiums  and  interest  from  policyholders.  The  bookkeep- 
ing department  ranks  among  the  most  important  branches 
of  the  office  work.  It  has  charge  of  the  numerous  cash, 
investment  and  insurance  accounts,  and  must  record  them  in 
such  a  practical  and  scientific  manner  as  to  enable  the  com- 
pany to  know  at  any  time  the  progress  of  its  business  and 
to  meet  the  demands  of  the  various  state  insurance  depart- 
ments for  information.  It  must  also  be  organized  in  such 
a  manner  as  to  permit  a  frequent  proving  of  the  correctness 
of  its  work.  The  secretary  has  charge  of  the  company's 
correspondence,  the  minutes  of  the  board  of  directors  and  its 
various  committees,,  and  the  company's  records.  He  also) 
prepares  the  reports  which  are  presented  to  the  board  of 
directors  and  its  committees,  and  is  frequently  charged  with 
the  oversight  of  the  office  organization  and  the  discipline  of 
employees.  The  superintendent  of  agents  selects  and  super- 
vises the  company's  agents  and,  as  concerns  the  field  force,, 
carries  out  the  instructions  of  the  head  of  his  department 
(usually  one  of  the  vice-presidents)  and  of  the  committees 
which  handle  agency  matters. 

Officials  Serving  in  an  Advisory  Capacity. —  These  are« 
the  actuary,  medical  director  and  counsel.  The  actuary's  work 
has  been  described  as  "the  forerunner  of  all  the  business  to- 
be  conducted,"  and  to  be  well  qualified  "  he  must  be  well  in- 
formed not  only  in  the  mathematical  part  of  his  profession,, 
but  must  have  considerable  practical  knowledge  of  life  in- 
surance before  it  will  be  safe  to  follow  his  advice."  2  His 
work  is  indispensable  if  the  company  wishes  to  conduct  its 
business  on  a  scientific  basis.  Previous  chapters  clearly 
indicate  that  premium  rates  and  cash,  paid-up,  extension  and 
loan  values  must  be  carefully  ascertained  before  contracts 
can  be  written.  The  actuary  also  calculates  the  reserves  and 
dividends  of  the  company.  From  time  to  time  it  is  nec- 
essary for  him  to  devise  policies  to  meet  the  needs  of  changing 

2  ENGLISH,  J.  L.,  "  Home  Office  Management,"  in  Dunham's  The 
Business  of  Insurance,  chap.  20,  p.  347. 


OKGANIZATION  OF  COMPANIES  331 

competitive  conditions  and  to  comply  with  the  requirements 
of  the  numerous  laws  adopted  by  the  various  states. 

The  medical  director  supervises  the  company's  force  of 
medical  examiners,  selects  the  physicians  who  shall  constitute 
this  force,  instructs  them  in  their  duties,  and  is  the  final 
authority  to  pass  upon  the  insurability  of  applicants.  The 
acceptance  of  a  risk  depends  mainly  upon  his  judgment, 
and  in  arriving  at  a  conclusion  he  must  consider  the  local 
examiner's  certificate  in  conjunction  with  the  facts  obtained 
from  the  application  and  sometimes  from  other  sources.  The 
work  of  the  medical  department  is  usually  supplemented  by 
an  inspection  department  whose  function  it  is  to  inquire  into 
the  habits  and  financial  responsibility  of  applicants. 

The  legal  department  is  charged  with  the  responsibility  of 
handling  all  of  the  company's  legal  matters.  These  include, 
among  other  things,  the  conduct  of  court  cases  growing  out 
of  contested  claims,  foreclosure  proceedings,  imperfect  titles, 
etc.;  the  sufficiency  and  correctness  of  policy  forms,  agency 
contracts,  bonds,  notes,  etc. ;  the  inspection  of  titles  to  property 
purchased  by  the  company  or  upon  which  it  has  granted 
loans;  and  the  analysis  and  interpretation  for  the  benefit  of 
the  company  of  the  statutory  and  court  law  governing  life 
insurance  in  those  states  where  the  company  operates. 

Other  Departments. —  In  addition  to  the  foregoing,  numer- 
ous other  departments  are  necessary  for  the  handling  of  the 
enormous  volume  of  details  that  make  up  the  work  of  a  large 
life-insurance  company.  Most  of  these  have  been  enumerated 
and  briefly  defined  on  pages  325  and  327,  and  need  not  be  re- 
ferred to  again.  Mention  may,  however,  be  made  of  the  fact 
that  a  considerable  number  of  companies  have,  in  addition 
to  the  departments  already  enumerated,  one  or  more  of  three 
other  departments,  namely,  a  statistical  department,  a  policy 
changes  department,  and  a  department  of  assignments.  The 
function  of  the  first  is  to  tabulate  the  experience  of  the  com- 
pany as  regards  the  numerous  classes  of  risks  insured,  the 
various  types  of  policies  written,  the  various  classes  of  in- 
vestments made,  etc.  The  data  collected  by  the  department, 


332          THE  PRINCIPLES  OF  LIFE  INSURANCE 

if  properly  interpreted  by  it,  should  prove  invaluable  especially 
to  the  executive  and  actuarial  departments  in  enabling  the 
company  to  profit  by  past  experience  with  a  view  to  improving 
its  future  prospects. 

It  is  also  apparent  that  in  a  large  company  numerous 
changes  of  beneficiaries  will  be  requested  by  policyholders,  and 
such  changes  frequently  involve  legal  and  other  dangers  which 
the  company  is  anxious  to  avoid.  During  the  early  policy 
years  numerous  contracts  are  also  changed  with  reference  to 
the  kind  of  insurance,  the  amount  of  premiums,  or  the  amount 
of  insurance,  and  all  such  changes  require  a  careful  adjust- 
ment between  the  old  and  the  new  contract.  To  facilitate 
the  speedy  and  careful  handling  of  such  changes  some  com- 
panies have  found  it  advisable  to  create  a  special  depart- 
ment for  the  purpose.  Furthermore,  life-insurance  policies 
are  frequently  assigned.  Such  assignments  must  be  duly  filed 
and  acknowledged,  and  must  be  examined  from  the  standpoint 
of  legality  and  accuracy.  While  the  companies  do  not  hold 
themselves  responsible  for  the  correctness  of  policy  assign- 
ments, they  nevertheless  desire  to  protect  the  insured  by  ex- 
tending advice  and  suggestions.  To  this  end  some  of  the 
companies  find  it  advantageous  to  have  a  department  of  as- 
signments, the  function  of  which  is  to  examine  carefully  all 
assignments  filed  with  the  company  and  call  the  attention  of 
the  parties  thereto  to  any  inaccuracies  or  illegalities  which  it 
may  discover. 

AGENCY  ORGANIZATION  AND  MANAGEMENT 

While  attempts  have  been  made  to  sell  life  insurance  directly 
to  the  public  through  advertising  and  circulars  or  through 
the  medium  of  savings  banks  or  certain  governmental  agencies 
like  the  post  office,  experience  has  shown  that  such  methods 
met  with  little  success.3  Like  any  other  costly  article  life 
insurance  must  be  sold,  and  its  benefits  can  be  widely  dissem- 
inated throughout  the  community  only  through  the  direct 

3  As  illustrative  of  the  practical  failure  of  such  methods,  see 
page  430  of  this  volume, 


ORGANIZATION  OF  COMPANIES  333 

solicitation  of  salesmen.  In  fact  their  labor  underlies  the 
upbuilding  of  life  insurance  as  a  vital  force  in  the  community, 
and  without  their  propaganda  only  the  limited  few  would 
secure  its  protective  influence.  Especially  is  this  the  case 
since,  as  has  been  said,  "  It  is  but  natural  to  procrastinate 
about  a  provision  that  needs  must  be  made  when  one  is  in 
good  health  and  does  not  need  it,  and  that  can  be  most  ad- 
vantageously made  when  young  and  the  contingency  provided 
against  probably,  and  at  least  apparently  very  remote/'  4 

Relation  Between  the  Home  Office  and  the  Field  Force. 
—  For  the  reason  just  mentioned  the  agency  department  is 
often  characterized  as  the  most  important  branch  of  the  home 
office.  It  is  usually  managed  by  one  of  the  vice-presidents  of 
the  company,  who  is  assisted  by  the  superintendent  of  agents. 
The  functions  of  the  department  are  varied,  and  consist  in 
securing  agents  and  managers,  assigning  to  them  their  re- 
spective territory,  instructing  them  in  their  work,  supervising 
the  home-office  correspondence  and  records  pertaining  to 
agents,  formulating  plans  for  improving  the  efficiency  and 
loyalty  of  the  service,  and  assisting  the  agency  forces  in  any 
special  difficulties  that  they  may  encounter.  Frequently  there 
are  several  assistant  superintendents  of  agents,  each  of  whom 
is  charged  with  the  duty  of  supervising  the  agency  force  in 
a  designated  group  of  states. 

Successful  agency  work  requires  not  only  the  most  effective 
organization  but  a  close  cooperative  relationship  between  the 
home  office  and  those  in  the  field.  To  this  end  united  action 
is  emphasized  as  much  as  possible.  Not  only  are  all  im- 
portant agency  questions  considered  by  special  committees  at 
the  home  office,  but  agents'  meetings  and  conventions  are 
organized  with  a  view  to  enabling  a  free  discussion  of  impor- 
tant questions  vitally  related  to  the  agent's  work  and  equip- 
ment. Many  of  the  companies  also  devote  much  attention 
to  the  education  of  their  agents  in  a  proper  understanding  of 
the  nature  and  uses  of  life  insurance  and  in  the  methods  of 

4 WOODS,  EDWARD  A.,  "Agency  Management,"  in  The  Business 
of  Insurance,  chap.  21. 


334        THE  PKINCIPLES  OF  LIFE  INSURANCE 

salesmanship.  Some  companies  conduct  special  courses  along 
these  lines  while  many  others  issue  numerous  educational 
leaflets  explanatory  of  the  various  types  of  contracts  and  their 
uses,  the  arguments  to  be  presented  in  selling  the  various 
classes  of  policies,  and  much  other  information  of  value  to 
the  agent  in  his  daily  work.  It  should  here  be  stated  that  the 
agent,  if  he  is  to  render  the  greatest  service  to  his  client  and 
pursue  his  calling  along  professional  lines,  should  be  well 
informed  concerning  those  phases  of  life  insurance,  such  as  the 
principles  of  rate-making,  the  operation  of  the  reserve, 
the  nature  and  sources  of  the  surplus,  etc.,  which  are 
necessary  to  a  correct  answering  of  the  numerous  questions 
which  are  commonly  asked  of  agents.  To  render  expert 
service  he  should  possess  a  thorough  knowledge  of  the  various 
types  of  policies  and  their  usefulness  under  certain  family 
and  business  circumstances,  and  of  the  various  forms  of 
settlement  and  their  advantages,  so  that  he  may  wisely  fit  the 
policy  to  the  real  needs  of  his  prospective  client.  He  should 
be  thoroughly  informed  with  regard  to  his  company's  invest- 
ments and  its  treatment  of  policyholders  as  regards  surrender 
and  loan  values,  and  should  be  in  a  position  to  present  the 
benefits  of  insurance  clearly  and  forcibly.  There  are  also 
many  legal  phases  connected  with  life  insurance,  as,  for  ex- 
ample, in  connection  with  the  naming  or  changing  of  the 
beneficiary  and  the  assignment  of  policies,  an  understanding 
of  which  will  greatly  enhance  the  agent's  usefulness.  Further- 
more, the  agent  should  not  consider  his  service  to  his  client 
completed  when  the  sale  of  a  policy  has  been  effected.  In- 
stead, his  advisory  relation  to  the  insured  and  the  beneficiary 
should  extend,  if  at  all  possible,  throughout  the  life  of  the 
policy  and,  as  regards  the  conservation  of  the  proceeds,  even 
after  it  matures.5 

Commissions  Paid  to  Agents. —  For  their-  services  agents 

s  For  an  extended  discussion  of  the  way  in  which  agents  should 
view  their  profe&sion,  see  the  address  on  "  How  the  Life  Insurance 
Agent  Should  View  His  Profession,"  published  as  Appendix  I  on 
pages  427  to  437  of  this  volume. 


ORGANIZATION  OF  COMPANIES  335 

receive  commissions  and  the  method  of  paying  them  usually 
assumes  one  of  two  forms.  One  consists  in  paying  a  high 
commission,  varying  let  us  say  from  30  to  50  per  cent.,  on 
the  first  year's  premium  and  a  small  percentage  of,  say,  5  per 
cent,  (called  a  renewal  commission)  on  subsequent  pre- 
miums for  a  designated  number  of  years.  This  method  is 
particularly  well  adapted  to  those  who  aim  to  write  permanent 
business,  since  renewal  commissions  mean  an  increasing  in- 
come from  year  to  year  to  the  agent  who  exerts  himself  in 
the  procurement  of  insurance  which  will  remain  on  the  books 
of  the  company.  The  other  method  consists  of  paying  a  some- 
what higher  commission  on  the  first  year's  premium  than  is 
allowed  under  the  first  method,  the  agent  receiving  no  re- 
newals on  subsequent  premiums.  This  plan,  it  is  appar- 
ent, is  apt  to  be  desired  by  those  who  consider  the  present 
more  important  than  the  future  and  who  desire  to  receive  a 
higher  income  at  once  in  preference  to  waiting  for  the  accu- 
mulating commissions  that  are  received  under  renewal  con- 
tracts. 

Types  of  Agency  Organization. —  Four  agency  systems 
are  used  in  the  life-insurance  business,  viz : 

1.  The  general-agency  system,  according  to  which 
a  general  agent  is  given  exclusive  control  of  a  certain  terri- 
tory with  power  to  organize  his  efforts  as  he  may  deem  best 
and  to  employ  agents  to  assist  him  on  such  terms  as  he  may 
see  fit. 

2.  The    branch-office    system,,    according   to    which 
branch  offices  are  operated  in  various  sections  of  the  country, 
each  being  in  charge  of  a  manager  and  a  cashier.     Under 
this  system  the  home  office  approves  the  contracts  made  with 
local  agents,  although  the  manager  appoints  and  directs  the 
same. 

3.  The  direct-agency  system,  according  to  which  the 
agents  are  appointed  and  supervised  from  the  home  office  with 
or  without  the  assignment  of  exclusive  territory. 

4.  The   brokerage  system    (of  relatively  much  less 
importance  than  the  other  plans),  according  to  which  the  con- 


336        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

tract  is  effected  directly  with  the  company  but  without  any 
arrangement  for  the  allotment  of  exclusive  territory  cr  the 
.payment  of  renewal  commissions. 

The  General-Agency  System. —  The  first  two  systems  have 
been  adopted  most  generally  as  the  plans  for  organizing  and 
controlling  the  operations  of  agents.  The  general-agency  sys- 
tem is  the  oldest  and  most  widely  used  of  the  two  plans,  and 
aims  to  accomplish  through  general  agents  what  the  other 
system  is  designed  to  do  through  branch  offices.  According 
to  the  plan  the  company  appoints  a  general  agent  to  represent 
it  within  a  designated  territory  over  which  he  is  given  control, 
and  by  contract  agrees  to  pay  him  a  stipulated  commission  on 
the  first  year's  premiums  plus  a  renewal  on  subsequent  pre- 
miums. In  return  the  general  agent  usually  agrees  to  devote 
himself  to  the  upbuilding  of  the  company's  business  in  his  dis- 
trict, to  employ  and  supervise  the  local  agents,  to  collect  pre- 
miums, and  to  pay  all  expenses  (save  only  the  fee  paid  to 
medical  examiners)  connected  with  the  operation  of  his 
agency.  He  is  also  empowered  to  engage  sub-agents  on  such 
terms  as  he  may  deem  best.  Thus  he  may  pay  them  all  of  his 
first  year's  commission  plus  a  renewal  somewhat  smaller  than 
that  which  he  receives  from  the  company,  or  he  might  pay 
all  of  the  commission  on  the  first  year's  premium  and  retain 
the  renewals  himself,  or,  again,  he  may  retain  a  portion  of 
both  the  first  year's  premium  and  the  renewals.  If  the  agency 
is  already  established  when  the  general  agent  is  appointed, 
the  company  will  usually  pay  him  collection  fees  on  the  pre- 
miums turned  in  on  the  business  which  his  predecessors  de- 
veloped, expecting  that  this  income  will  be  utilized  for  the 
upbuilding  of  the  agency.  If  the  agency,  however,  is  just 
being  established,  the  company  will  often  advance  to  the  gen- 
eral agent  the  capital  necessary  for  development  and  reimburse 
itself  out  of  the  commissions  accruing  under  his  contract. 
Frequently  the  contract  also  requires  the  general  agent  to 
produce  a  stipulated  amount  of  business  within  a  designated 
time. 

Two  classes  of  general  agencies  are  described  by  Mr.  Ed- 


ORGANIZATION  OF  COMPANIES  337 

ward  A.  Woods  in  his  article  on  "  Agency  Management/'  6 
viz:  (1)  those  where  the  general  agent  relies  chiefly  upon  his 
own  personal  business  for  his  main  profit  and  considers  the 
income  derived  from  his  sub-agents  as  of  minor  importance; 
and  (2)  those  where  the  general  agent  subordinates  his  per- 
sonal business  and  aims  to  develop  a  large  force  of  sub-agents 
with  a  view  to  deriving  his  chief  profit  from  the  marginal 
difference  between  the  commissions  and  renewals  paid  by 
him  to  such  agents  and  tfrose  which  he  receives  from  the 
company.  If  belonging  to  the  first  class  the  general  agent 
will  consider  his  personal  business  of  greatest  importance  and 
will  select  those  prospective  applicants  which  he  can  handle 
best  himself.  Needless  to  say  such  an  agency  is  not  as  ad- 
vantageous to  sub-agents  as  the  second  class  where,  although 
it  should  always  be  the  aim  of  the  general  agent  to  obtain  some 
personal  business,  he  will  nevertheless  promote  the  welfare  of 
his  agents  in  preference  to  the  interests  of  himself  or  his 
office.  As  Mr.  Woods  explains : 7 

It  should  be  the  policy  of  the  general  agent  to  subordinate 
his  own  interest  and  that  of  the  office  to  his  agents;  to  have 
them  feel  that  their  interests  are  preferred,  that  they  will  be 
given  first  opportunity  to  profit  by  leads  of  all  kinds  secured  by 
the  office;  in  all  cases  of  conflict  of  interest  to  give  all  reason- 
able preference  to  sub-agents.  Some  agencies  further  protect 
them  by  refusing  business  from  all  outsiders  or  by  declining  to 
pay,  or  permitting  their  agents  to  pay,  so-called  "  helpers  or 
handshakers"  or  any  outsiders  any  part  of  their  commissions 
in  any  way,  causing  it  to  be  understood  that  the  interests  of 
its  agents  are  first  in  the  agency.  Such  an  agency  will  be  built 
up  slowly,  because  obviously  the  small  marginal  commission 
upon  first,  if  any,  and  renewal,  premiums  will  be  slow  in  ag- 
gregating any  considerable  amount;  but  it  should  ultimately 
exceed  what  will  be  possible  for  the  first  form  of  general  agency. 

6  For  an  excellent  discussion  of  the  nature  of  a  general  agency 
and  the  business  policy  which   such  an  agency  should  pursue,  see 
the  article  by   Mr.   Edward   A.  Woods   on   "  Agency   Management," 
chap.  21  of  Vol.  I  of  H.  P.  Dunham's  The  Business  of  Insurance. 
This  article  is  limited  to  a  discussion  of  the  general-agency  system. 

7  DUNHAM,  H.  P.,  The  Business  of  Insurance,  i,  360. 


338       THE  PRINCIPLES  OF  LIFE  INSURANCE 

When  thoroughly  established  the  latter  will  not  be  so  dependent 
upon  the  personal  effort  of  the  general  agent  and  will  gradu- 
ally attract  more  and  more  successful  agents  to  its  standard.8 

The  Branch-Office  System. —  As  contrasted  with  the  gen- 
eral-agency system,  this  plan  is  more  recent  in  its  develop- 
ment and  is  gaining  in  relative  importance  especially  among 
the  large  companies.  Its  purpose,  as  already  explained,  is  to 
establish  branch  offices  in  various  districts  in  charge  of  a 
manager  and  cashier.  The  manager,  usually  selected  because 
of  his  success  as  an  agent,  is  charged  with  the  responsibility 
of  securing  and  directing  agents  within  his  territory  and  of 
instructing  and  otherwise  helping  and  encouraging  them  in 
their  work  as  solicitors.  The  cashier,  on  the  other  hand,  to 

8  Attention  may  here  be  called  to  the  increasing  tendency  towards 
specialization  in  some  of  the  large  agencies.  Mr.  Woods  writes  in 
this  connection: 

"  The  future  large,  successful  agency  will  be  further  specialized 
in  that  its  most  experienced  and  expert  closers  will  be  more  eco- 
nomically employed  in  giving  their  time  to  closing  cases  jointly 
with  agents  who  are  better  able  to  bring  in  prospects  than  to  close 
them.  Joint  work  will  be  increasingly  the  rule,  as  it  is  in  impor- 
tant cases  in  medicine  and  law,  and  it  will  be  the  business  of  the 
younger  and  less  experienced  agents  more  to  hunt  up  persons  inter- 
ested in  or  needing  life  insurance  and,  by  utilizing  the  skill  of  the 
expert  closer,  acquire  commissions  more  economically  and  efficiently, 
just  as  the  able  lawyer  or  physician  employs  assistants  to  prepare 
cases  or  make  the  early  examinations  of  patients.  Some  large 
agencies  have  bureaus,  referred  to  above,  which  supply  prospects, 
giving  the  agent  sufficient  data  and  information  as  to  persons  re- 
quiring insurance,  able  to  get  and  pay  for  it,  and  the  reasons  to  be 
presented  why  it  should  be  secured.  These  prospects,  while,  of 
course,  they  supplement  the  agent's  own  natural  clientage,  can  be 
much  more  cheaply  secured  by  a  bureau  established  for  this  pur- 
pose than  by  the  agent,  whose  time  is  more  valuable  when  employed 
in  the  work  of  developing  cases. 

"  Such  an  agency  will  further  have  specialists  in  various  kinds 
of  insurance,  to  whom  all  such  cases  will  be  brought  and  worked 
as  joint  business.  It  will,  for  example,  probably  have  one  or  more 
agents  who  make  a  specialty  of:  Income  Insurance,  Corporation  or 
Partnership  Insurance,  Insurance  to  Protect  Bank  and  Other  Cred- 
its, Insurance  for  Philanthropies  and  Charities,  Employee  Insurance, 
and  Annuities.  These  men  will  be  experts  in  these  lines  and  the 
general  economic  questions  affecting  them." 


ORGANIZATION  OF  COMPANIES  339 

quote  Mr.  Lunger,  "  is  charged  with  the  collection  of  pre- 
miums and  the  interest  on  policy  loans  and  with  the  keeping 
of  all  office  records.  He  is  expected  to  look  after  all  corre- 
spondence in  connection  with  applications  and  policies,  notify 
delinquent  policyholders  of  their  obligations,  attend  to  filling 
in  proofs  of  loss,  applications  for  policy  loans  and  payment  of 
maturing  endowments  and  answer  all  communications  from 
policyholders  which  are  not  of  sufficient  importance  to  be 
referred  to  the  home  .office.  He  is  also  charged  with  the 
supervision,  efficiency  and  conduct  of  the  clerical  staff.  As 
in  the  case  of  the  officials  at  the  home  office,  the  managers, 
cashiers  and  clerks  at  the  branch  office  are  paid  by  salary, 
although  the  manager  sometimes  receives  extra  payments 
(bonuses)  for  increasing  the  volume  of  business  through  his 
office  and  for  adding  to  the  number  of  productive  agents."  9 

Arguments  Advanced  in  Favor  of  the  Two  Plans.— 
Much  has  been  written  about  the  relative  merits  of  the  gen- 
eral-agency and  branch-office  systems,  some  supporting  one 
plan  and  some  the  other,  and  it  may  be  well  to  indicate  the 
principal  contentions.  The  general-agency  system,  it  is 
argued,  has  the  twofold  advantage  of  definitely  fixing  the  cost 
which  the  company  incurs  in  securing  its  business ;  and  of  re- 
lieving the  company  of  the  trouble  connected  with  the  super- 
vision of  many  agents  and  the  risks  incident  to  the  financial 
relations  into  which  the  company  would  otherwise  have  to 
enter  with  numerous  agents.  The  supporters  of  the  branch- 
office  system,  on  the  other  hand,  maintain  that  it  is  more 
economical  because  of  the  more  prompt  collection  and  re- 
mittance of  premiums,  agents  under  this  system  being  re- 
quired to  make  prompt  payments,  and  all  collections  of  pre- 
miums and  interest  being  deposited  at  once  to  the  credit  of  the 
company  and  thus  made  available  for  immediate  invest- 
ment. This  contention  has  reference  to  the  common  practice 
of  allowing  general  agents  a  considerable  period  of  grace  in 

9  LUNGER,  JOHN  B.,  "Organization  of  Agencies:  Details  of  the 
Branch  Office  System,"  Yale  Insurance  Lectures,  i,  131-132.  Thia 
.article  furnishes  an  excellent  description  of  the  branch-office  system. 


340        THE  PKINCIPLES  OF  LIFE  INSURANCE 

making  their  collections  and  remittances,  thus  leading  to 
the  piling  up  of  bank  balances  in  favor  of  the  agency  or  to 
slackness  on  the  part  of  policyholders  in  paying  their  pre- 
miums. It  is  further  argued  that  the  general-agency  system 
causes  a  lack  of  uniformity  since  the  general  agent  can  con- 
trol and  pay  his  agent  as  he  pleases,  whereas  under  the  branch- 
office  system  "  the  company  conducts  all  of  its  agency  affairs 
directly  from  the  home  office  through  its  own  branch  offices, 
rented  in  the  company's  name,  and  placed  in  charge  of  man- 
agers under  salary.  ...  In  a  few  words,  the  company  acts 
as  its  own  general  agent,  develops  its  own  plan  for  the  super- 
vision, education  and  control  of  agents,  and  so  conducts  its 
affairs  that  any  margin  of  profit  in  commissions  reverts  to 
the  company  for  the  benefit  of  its  policyholders  instead  of 
going  to  a  general  agent."  10  Again,  under  the  general-agency 
system  soliciting  agents  have  direct  relations  only  with  the 
general  agent,  he  being  the  only  representative  of  the  company 
with  whom  they  come  into  business  contact.  It,  therefore, 
follows  that  unless  the  general  agent  calls  the  company's 
attention  to  the  fact,  the  records  and  abilities  of  competent 
solicitors  may  remain  unknown  to  the  officials  of  the  com- 
pany. 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  "  An  Analysis  of  Agency  Systems,"  in  The 
Business  of  Life  Insurance,  chap.  16. 

DUNHAM,  S.  C.,  "  The  Systematic  Training  of  Agents."  Pro- 
ceedings of  the  Association  of  Life  Insurance  Presidents, 
1910,  88. 

ENGLISH,  J.  L.,  "  Home  Office  Management,"  in  H.  P.  Dun- 
ham's The  Business  of  Insurance,  i.  343-356. 

LUNGER,  J.  B.,  "  Office  Organization  in  Life  Insurance."     Yale 

Insurance  Lectures,  i,  113-125. 

,  "  Organization  of  Agencies  in  Life  Insurance :  De- 
tails of  the  Branch-Office  System."     Yale  Insurance  Lee- 
.     tures,  i,  126-143. 

10  LUNGER,  JOHN  B.,  "  Organization  of  Agencies,"  Tale  Insurance 
Lectures,  i,  136. 


ORGANIZATION  OF  COMPANIES  341 

WOODS,  EDWARD  A.,  "Agency  Management,"  in  H.  P.  Dun- 
ham's The  Business  of  Insurance,  chap.  21,  pp.  355- 
373. 


CHAPTER  XXVI 
LIFE-INSURANCE  INVESTMENTS 

Considerations  that  Should  Govern  Companies  in  Mak- 
ing Their  Investments. —  The  investment  of  life-insurance 
funds  is  important  chiefly  because  of  the  fact  that  the  com- 
panies must  maintain  reserves  (which  we  have  seen  represent 
advance  collections  frbm  policyholders)  for  all  the  contracts 
issued  on  the  life  and  endowment  plans,  and  that  their  obli- 
gations under  these  contracts  do  not  mature  as  a  rule  until 
the  distant  future.  Since  these  reserve  funds,  constituting 
over  four-fifths  of  the  total  funds  held  by  American  companies 
to-day,  serve  as  a  guarantee  for  the  payment  of  claims,  it  is 
of  the  utmost  importance  that  the  greatest  care  should  be 
exercised  to  conserve  them  properly  against  loss.  This  is  es- 
pecially true  since  the  mission  of  life  insurance  is  a  peculiarly 
sacred  one,  the  insured  relying  upon  it  in  the  great  majority  of 
instances  as  the  principal  means  of  protecting  his  dependents 
against  want.  The  great  majority  of  contracts,  as  already 
noted,  will  run  for  many  years  before  maturing  and  an  in- 
creasingly large  number  have  for  their  purpose  the  provision 
of  a  certain  income  for  the  beneficiary  for  life,  thus  in  ever  so 
many  cases  involving  an  obligation  on  the  part  of  the  company 
which  will  extend  over  a  period  of  fifty  or  seventy-five  years. 
Life-insurance  protection  to  be  real  must  be  absolutely  re- 
liable, and  life-insurance  funds  must,  therefore,  be  in- 
vested with  such  care  as  to  preclude  during  all  this  time  the 
possibility  of  failure  on  the  part  of  companies  to  meet  their 
obligations.  Almost  the  greatest  calamity  that  can  be  im- 
agined is  the  inability  of  a  company  to  meet  its  contracts 
on  which  the  insured  has  paid  premiums  for  years  and  upon 
which  he  is  placing  dependence,  and  thus  leave  unprotected 

342 


LIFE-INSURANCE  INVESTMENTS  343 

the  home  which  it  is-  the  fundamental  purpose  of  life  insurance 
to  hedge  against  the  loss  of  the  earning  capacity  of  the  bread- 
winner. 

But  while  the  absolute  security  of  the  principal  is  the 
chief  consideration  that  should  guide  companies  in  making 
their  investments,  four  other  factors  should  also  be  borne  in 
mind.  Briefly  enumerated  these  are : 

1.  It  should  be  the  purpose  of  the  companies  so  to  make 
their  investments  as  to  yield  the  largest  return  consistent  with 
absolute  safety.     Needless  to  say  life-insurance  investments 
must  give  a  return  at  least  equal  to  the  rate  which  has  been 
assumed  for  premium  and  reserve  computations.     But  this 
rate  is  so  low  at  present,  being  only  3  or  3y2  per  cent.,  that 
the  companies'  investments  may  easily  be  made  to-day  to 
yield  a  higher  rate  and  thus  reduce  the  cost  of  insurance  to 
the  policyholders  who  contribute  the  funds.     To  accomplish 
this  purpose  safely  investments  should  be  so  distributed,  both 
as  regards  the  number  and  classes  of  investments,  that  the 
company  may  secure  the  benefits  of  the  law  of  average  and 
have  a  loss  in  one  investment  balanced  by  a  gain  in  another. 
As  a  rule,  adverse  tendencies  in  one  class  of  investments  will 
be  equalized  by  favorable  tendencies  in  another. 

2.  It  should  be  the  purpose  of  companies  to  invest  a  con- 
siderable proportion  of  their  funds  in  long-term  investments. 
Such  a  course  will  not  only  lower  the  expense  of  maintaining 
the  investments,  but  is  apt  to  secure  a  better  yield  over  long 
periods  of  time. 

3.  Since  the  companies  have  followed  the  practice  of  issuing 
contracts  which  promise  loan  or  cash  surrender  values  upon 
demand  by  the  insured,  they  should  protect  themselves  against 
any  unusual  demand  of  this  character  by  investing  a  fair 
proportion  of  their  funds  in  securities  which  are  readily  con- 
vertible into  cash. 

4.  But  with  the  exception  of  surrender  values  and  policy 
loans,  and  the  latter  we  have  seen  are  now  often  subjected 
to  a  sixty-  or  ninety-day  restriction,  life-insurance  companies 
are   practically   exempt   from   the    dangers    connected   with 


344       THE  PRINCIPLES  OF  LIFE  INSURANCE 

demand  obligations.  In  this  respect  they  differ  essentially 
from  banks  and  other  financial  institutions  which  accept  de- 
posits subject  to  demand  and  must,  therefore,  fortify  them- 
selves against  unusual  withdrawals  in  time  of  emergency  by 
keeping  most  of  their  funds  in  the  form  of  liquid  assets.  A 
life-insurance  company's  chief  liability,  on  the  contrary,  is  for 
the  payment  of  death  benefits  and  maturing  endowments,  and 
such  payments  can  be  estimated  with  remarkable  precision. 
Not  only  may  life-insurance  companies  therefore  invest  a  large 
proportion  of  their  funds  in  long-term  securities  but  the 
greater  part  of  their  investments  need  not  be  so  readily  salable 
for  cash  as  those  held  by  most  other  financial  institutions. 
Since  their  daily  claims  can  be  estimated  accurately  it  is  also 
unnecessary  for  the  companies  to  keep  large  and  unproductive 
cash  balances  on  hand. 

State  Regulation  of  Investments. —  Recognizing  the  vital 
relationship  between  the  conservative  handling  of  life-insur- 
ance funds  and  the  ability  of  the  companies  to  meet  obligations 
which  extend  over  long  periods  of  time,  nearly  all  the  states 
have  undertaken  to  regulate  life-insurance  investments  in  one 
form  or  another.  Some  of  the  more  specific  regulations  will 
be  referred  to  in  the  discussion  of  the  various  types  of  in- 
vestments. Suffice  it  to  state  that  most  of  the  legislatures 
take  the  position  that  the  companies  have  undertaken  trusts 
of  the  greatest  importance  and  that  those  who  are  named  as 
beneficiaries  thereunder  should  be  protected  by  law  to  the 
fullest  extent  possible.  To  this  end  the  several  states  have 
enacted  laws  which  require  the  companies  to  invest  their  re- 
sources in  such  securities  as  will  yield  a  reasonable  return 
and  which,  as  regards  both  principal  and  yield,  will  be  so  un- 
questionably safe  as  to  secure  policyholdefs  during  the  many 
years  that  may  elapse  before  their  contracts  mature. 

While  most  of  the  states  specify  the  particular  securities 
which  savings  banks  may  invest  in,  that  method  has  not  been 
followed  in  the  case  of  life-insurance  companies.  Instead, 
the  laws  are  here  concerned  with  classes  of  investments  rather 
than  specific  bonds,  stocks,  and  other  securities.  They  either 


LIFE-INSURANCE  INVESTMENTS  345 

definitely  prohibit  or  approve  certain  classes  of  investments.1 
Great  lack  of  uniformity,  however,  exists  in  the  requirements 
and  restrictions  adopted  by  the  different  states.  All  the  states 
permit  investments  in  government  bonds.  Some  limit  bond 
investments  and  mortgage  loans  to  those  of  the  home  state, 
while  others  prohibit  companies  operating  within  their  bounda- 
ries from  investing  in  the  stock  issues  of  any  corporation.  A 
few  exclude  the  securities  of  all  mining  and  manufacturing 
companies,  and  of  all  corporations  that  have  failed  to  pay 
their  regular  interest  and  dividends  at  any  time  during  a 
designated  number  of  years.  While  some  states  specify  the 
margin  that  must  exist  in  the  case  of  collateral  loans,  others 
do  not.  Real-estate  mortgages,  available  for  life-insurance 
companies,  are  usually  carefully  defined,  the  value  of  the 
property  being  generally  twice  the  amount  loaned.  Some  of 
the  states  have  also  shown  a  decided  tendency  to  limit  a  com- 
pany's holdings  of  real  estate  to  what  is  actually  necessary  for 
the  convenient  conduct  of  business.  Some  of  the  states  have 
also  sought  to  enlarge  the  field  for  their  own  securities  by 
adopting  legislation  which  compels  insurance  companies  to 
invest  a  large  portion  of  their  reserves  in  such  securities. 
It  is  also  general  to  require  the  companies  to  make  to  the 
insurance  department  of  the  state  annual  statements  which 

i  The  effect  of  such  legislation,  generally  speaking,  is  to  limit  life- 
insurance  investments  to  the  following  classes: 

1.  Bonds  of  the  United  States  and  of  the  state  under  considera- 
tion. 

2.  Bonds  of  cities  or  counties  within  the  state  on  which  there  has 
been  no  default  in  interest. 

3.  Bonds  of  any  other  state  on  which  there  has  been  no  default  in 
interest  and  which,  it  may  be  provided,  must  sell  at  a  certain  price 
at  the  time  of  purchase. 

4.  The  bonds  of  solvent  dividend-paying  corporations,  and  in  most 
states  also  the  stock  of  such  corporations. 

5.  First  real-estate  mortgages  where  the  property  is  worth  double 
the  amount  of  the  mortgage. 

6.  Such  real  estate  as  may  be  needed  for  the  convenient  conduct 
of  business,  or  which  may  come  to  the  company  by  way  of  foreclosure 
on  mortgages  held,  or  which  it  takes  as  additional  security  for  the 
protection  of  a  loan. 


346        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

give  a  complete  and  detailed  list  of  investments,  together  with 
such  other  information  as  the  commissioner  may  request. 

Numerous  other  restrictions  have  been  adopted  by  various 
states  but  only  a  few  need  be  enumerated  for  illustrative  pur- 
poses. Thus  it  is  common  to  provide  that  not  over  one-half 
of  the  capital  stock  of  a  company  may  be  invested  in  mort- 
gages on  real  estate  and  not  over  one-tenth  in  a  single  mort- 
gage, that  no  loans  on  personal  security  may  be  made,  and 
that  the  directors  are  held  personally  liable  from  any  loss 
from  investments  which  are  not  made  according  to  law. 
Many  of  the  states  also  prohibit  officers  and  directors  from 
receiving  any  commission  or  profit  upon  purchases  or  loans 
made  by  the  company;  while  in  other  states  it  is  provided 
that  companies  may  not  enter  into  underwriting  participa- 
tions or  transactions  for  joint  account.  It  should  also  be 
noted  that  while  some  states  have  enacted  practically  no  legisla- 
tion for  the  regulation  of  life-insurance  investments,  the  in- 
surance commissioners  in  such  states  usually  possess  discre- 
tionary powers  in  the  matter  and  generally  pursue  a  course 
along  the  lines  adopted  in  other  states. 

The  Extent  and  Character  of  Investments. —  Through 
their  enormous  investments  life-insurance  companies  to-day 
exert  a  powerful  influence  on  the  upbuilding  of  the  nation's 
industrial  life.  Two  hundred  and  fifty-nine  companies,  re- 
ported in  the  1913  Insurance  Year  Book,  possess  total  admit- 
ted assets  of  $4,658,696,337,  and  at  present  this  gigantic  fund 
is  increasing  annually  at  the  rate  of  about  $250,000,000.  As 
stated  on  page  26,  the  significance  of  these  large  totals  be- 
comes apparent  when  it  is  stated  that  they  represent  the 
contributions  over  a  long  series  of  years  of  millions  of  policy- 
holders  each  of  whom  has  contributed  his  little  mite.  The 
companies  in  other  words  have  been  the  medium  through 
which  a  vast  aggregation  of  small  sums  has  been  devoted  to 
the  furtherance  on  a  large  scale  of  the  nation's  leading  business 
interests.  Of  the  funds  on  hand  at  the  close  of  1913,  $3,903,- 
615,175,  or  83.8  per  cent,  of  the  total,  represented  the  re- 
serve value  of  policies;  $522,334,468,  or  11.2  per  cent.,  sur- 


LIFE-INSUKANCE  INVESTMENTS 


347 


plus  to  policyholders ;  $111,373,932,  or  2 A  per  cent.,  unpaid 
dividends;  and  $121,372,762,  or  2.6  per  cent.,  all  other  lia- 
bilities. The  character  of  the  investments  and  the  relative 
importance  of  each  class  is  indicated  by  the  following  table: 


TYPES  OF  ASSETS 

AMOUNT 

PERCENTAGE 

OF 

TOTAL 

Real   estate   owned 

$    165  648  871 

3  5 

Real-estate  mortgages 

1  617  873  512 

34  7 

Bonds   owned    

1,908,943,098 

40.8 

Stock  owned    

85,879,873 

1.8 

Collateral  loans    

20,590,870 

.4 

Premium  notes  and  policy  loans.  .  .  . 
Cash  in  offices  and  banks 

657,994,947 
73  112  720 

14.1 
1  6 

Net  deferred  and  unpaid  premiums  .  . 
All  other  assets           .              .... 

63,397,935 
65,254,511 

1.4 

1  4 

Judging  from  the  foregoing  table,  bonds  and  real-estate 
mortgages  are  by  far  the  most  important,  representing  re- 
spectively 40.8  per  cent,  and  34.7  per  cent,  (or  over  three- 
fourths  when  combined)  of  the  total  assets  of  the  companies. 
If  we  add  to  these  the  item  of  premium  notes  and  policy 
loans  we  find  that  three  out  of  the  nine  classes  of  assets  rep- 
resent nearly  nine-tenths  of  the  total.  Eeferring  again  to 
our  former  discussion  of  the  influence  of  life-insurance  in- 
vestments as  a  factor  in  our  industrial  development  it  was 
noted  2  that  the  investments  of  nearly  $2,000,000,000  in  bonds 
and  stocks  will  be  found  fairly  well  distributed  over  the 
principal  transportation  and  other  corporate  properties  of 
the  country  and  represent  a  very  substantial  part  of  the  total 
funds  that  have  been  necessary  for  their  development.  The 
$1,600,000,000  of  real-estate  mortgages  also  represent  invest- 
ments in  properties  located  in  all  parts  of  the  country.  Be- 
cause of  such  loans,  owners  of  real  estate  have  been  enabled 
to  erect  buildings  or  otherwise  improve  their  properties.  Not 
only  have  large  sums  been  furnished  for  the  development  of 

2  See  page  26  of  this  volume. 


348        THE  PRINCIPLES  OF  LIFE  INSURANCE 

cities  and  towns,  but  for  many  years  the  companies  have 
granted  loans  upon  western  farming  lands,  thus  enabling  the 
purchase;  stocking  and  cultivation  of  large  areas. 

Nature  and  Merits  of  the  Various  Types  of  Investments. 
—  Having  enumerated  the  several  classes  of  life-insurance 
investments  we  may  next  pass  to  a  more  detailed  discussion 
of  their  nature  and  relative  merits.  For  this  purpose  the 
several  types  of  assets  may  be  considered  conveniently  in  the 
order  of  their  importance : 

Bond  investments. —  These  are  principally  of  two 
kinds,  viz,  the  bonds  of  standard  railroad  companies  and 
government,  state,  and  municipal  bonds.  Standard  railroad 
bonds  not  only  meet  the  requirements  of  safety,  but  usually 
run  for  long  periods,  yield  a  fair  return,  are  readily  con- 
vertible into  cash,  and  in  most  instances,  although  subject  to 
considerable  market  fluctuations,  show  a  tendency  to  increase 
in  value  in  the  course  of  years.  To  ascertain  the  security  of 
such  bond  issues  it  is  necessary  to  examine  the  reports  of 
railroads  for  a  series  of  years  with  a  view  to  noting  the  in- 
crease or  decrease  of  gross  earnings,  the  nature,  stability  and 
future  prospects  of  this  traffic,  the  expenditures  for  main- 
tenance and  improvements  to  keep  the  property  in  the  best 
working  condition,  and  the  extent  and  stability  of  the  net 
earnings  as  measured  from  the  standpoint  of  the  require- 
ments of  the  particular  bond  issue  under  consideration.  The 
utmost  care  is  exercised  to  select  only  such  issues  as  are 
fortified,  judging  the  matter  from  the  standpoint  of  a  series 
of  years,  with  a  big  margin  of  safety  as  regards  net  earnings. 
Bonds  of  public  utility  enterprises  and  of  industrial  corpora- 
tions are  not  regarded  with  much  favor  by  the  conservative 
companies.  The  first,  as  a  rule,  depend  too  much  upon 
legislative  franchises  and  are  therefore  subject  to  political 
attacks;  while  the  latter  are  too  dependent  upon  good  per- 
sonal management  and  too  severely  affected  by  business  de- 
pressions. 

State,  municipal,  county,  township  and  school  district  bonds 
are  regarded  by  many  writers  on  the  subject  as  constituting 


LIFE-INSURANCE  INVESTMENTS  349 

probably  the  best  class  of  life-insurance  investments.  Al- 
though the  issues  are  frequently  not  large,  the  companies 
often  succeed  in  securing  all  or  nearly  all  of  the  issue  when 
it  is  offered  for  competitive  bids.  The  interest  yield  is,  as 
a  rule,  somewhat  higher  than  that  obtained  on  good  rail- 
road bonds  and  the  issues  usually  run  for  considerable  periods 
of  time.  Most  of  the  issues,  however,  are  not  listed  and 
theref ore,. although  having  the  advantage  of  being  compara- 
tively free  from  market  fluctuations,  are  not  so  readily  con- 
verted into  cash  as  listed  bonds.  But,  as  has  been  seen,  a 
life-insurance  company  is  not  under  the  necessity  of  having 
a  very  large  proportion  of  its  resources  in  the  form  of  liquid 
assets.  It  may,  therefore,  supplement  its  holdings  of  rail- 
road bonds  with  a  considerable  line  of  municipal  and  other 
public  bonds.  The  attractiveness  of  railroad  and  government 
bonds  to  insurance  companies  is  indicated  by  the  fact  that, 
whereas  such  investments  aggregated  only  about  22  per  cent, 
of  the  total  assets  of  the  companies  in  1890,  this  percentage 
had  increased  to  40.8  per  cent,  in  1913.  An  examination  of 
the  assets  of  some  of  the  largest  companies  doing  a  foreign 
business  also  shows  a  liberal  holding  of  low  interest-bearing 
foreign  government  bonds,  a  fact  chiefly  attributable  to  the 
laws  of  certain  countries  which  require  insurance  companies, 
if  they  wish  to  transact  business  there,  to  invest  a  certain 
proportion  of  the  reserve  value  of  policies  in  securities  of  that 
country. 

Real-estate  mortgages. —  This  type  of  asset  represents 
over  one-third  of  the  total  assets  of  life-insurance  companies. 
Such  investments,  when  carefully  placed  and  when  restricted 
to  desirable  classes  of  property,  constitute  a  safe  and  excellent 
investment  for  life-insurance  funds.  They  yield  a  better  re- 
turn than  do  standard  railroad  bonds,  and  are  not  subject 
to  such  frequent  market  fluctuations  as  listed  securities.  Usu- 
ally the  states  limit  such  investments  to  one-half  the  ap- 
praised value  of  the  property  given  as  security.  Most  of  the 
companies  also  follow  the  practice  of  confining  such  loans  to 
improved  property,  i.e.  ordinary  residences,  cultivated  farms, 


350        THE  PRINCIPLES  OF  LIFE  INSURANCE 

and  business  properties  which  yield  a  satisfactory  income  and 
are  available  for  general  use.  Properties  devoted  to  special 
uses,  such  as  hotels,  theaters,  churches,  factories,  expensive 
residences,  etc.,  are  generally  excluded.  While  possessing 
the  advantage  of  a  high  interest  yield  combined  with  great 
safety,  real-estate  mortgage  investments  require  special  super- 
vision and  a  considerable  outlay  in  the  form  of  investment 
expenses.  As  previously  noted,  many  of  the  companies  possess 
a  real-estate  loan  department  which  is  charged  with  the  re- 
sponsibility of  keeping  the  mortgaged  premises  under  ob- 
servation and  of  seeing  that  the  buildings  are  kept  in  proper 
repair  and  that  all  taxes  are  paid.  Care  must  also  be  ex- 
ercised in  ascertaining  the  completeness  of  the  title  to  the 
mortgaged  premises,  and  any  other  mortgages  and  incum- 
brances  that  may  stand  against  the  property. 

Premium  notes  and  policy  loans. —  The  nature  and 
remarkable  growth  of  such  loans  have  already  been  discussed,3 
and  need  not  again  be  referred  to  at  length.  They  represent 
advances  to  the  policyholder,  the  policy  itself  being  assigned 
to  the  company  as  security.  Since  such  loans  are  limited  to 
the  reserve  value  of  the  policies,  and  in  many  instances  to 
less,  they  are  really  advances  against  cash  deposits  made  by 
the  insured  to  the  company,  and  are,  therefore,  absolutely 
safe.  Usually  5  or  6  per  cent,  interest  is  charged  on  the  loans 
and  the  insured  usually  has  the  right  to  repay  the  loan  at 
will  or  to  continue  the  same  indefinitely.  Should  a  policy 
on  which  a  loan  has  been  made  be  surrendered  or  lapsed  the 
company  deducts  the  total  indebtedness  from  the  surrender 
value. 

Real-estate  holdings. —  Such  holdings  include  all 
property  that  has  come  to  the  companies  by  way  of  foreclosure 
proceedings  on  mortgages  held  or  which  is  required  for  the 
convenient  conduct  of  their  business.  The  ratio  of  such  hold- 
ings to  the  total  assets  of  the  companies  is  to-day  only  3.5 
per  cent.,  although  in  1910  the  ratio  stood  as  high  as  10  per 

s  See  page  242  of  this  volume. 


LIFE-INSURANCE  INVESTMENTS  351 

cent.  Serious  abuses  were  at  one  time  connected  with  this 
form  of  investment,  such  as,  for  example,  the  construction  of 
large  office  buildings  chiefly  for  advertising  purposes  but 
which  yielded  on  the  investment  even  much  less  than  the  as- 
sumed rate  of  interest,  and  the  renting  of  quarters  in  said 
buildings  to  interested  parties  for  long  periods  of  time  at 
nominal  rents.  To  prevent  such  abuses  many  of  the  states 
have  enacted  laws  which  restrict  real-estate  investments  to 
property  necessary  for  the  convenient  conduct  of  business, 
and  which  require  that  such  property  as  may  be  acquired 
through  the  foreclosure  of  mortgages  must  be  sold  within 
a  stipulated  number  of  years. 

Stock  investments. —  This  form  of  investment  has 
been  the  subject  of  much  adverse  criticism  during  recent 
years,  and  the  ratio  of  corporate  stocks  to  the  entire  assets 
of  the  companies  was  only  1.8  per  cent,  at  the  close  of  1913  as 
compared  with  nearly  6  per  cent,  in  1900.  Not  only  did 
some  of  the  companies,  although  not  obliged  by  law  to  omit 
such  investments,  advertise  the  fact  that  none  of  their  assets 
were  invested  in  stocks,  but  the  states  are  showing  a  distinct 
disposition  to  enact  legislation  prohibiting  the  investment 
of  life-insurance  funds  in  such  securities,  or  in  loans  whose 
collateral  consists  of  stock  to  one-third  or  more  of  its  value. 
Various  considerations  have  led  to  this  type  of  legislation. 
Life-insurance  funds  are  considered  as  trust  funds  and  should, 
therefore,  not  be  invested  in  speculative  securities.  The  New 
York  insurance  investigation  of  1906  also  showed  clearly 
that,  if  insurance  companies  are  allowed  to  invest  in  stocks,  it 
becomes  possible  for  some  of  their  officials  to  organize  and 
finance  banks,  trust  companies  and  other  corporations  for 
purposes  of  private  gain.  It  is  also  argued  that  stock  owner- 
ship amounts  to  engaging  in  the  business  of  the  corpora- 
tion whose  stock  is  held,  and  in  this  respect  it  should  be 
noted  that  much  of  the  stock  owned  by  life-insurance  com- 
panies consisted  of  bank  and  trust  company  stocks,  the 
amounts  held  being  frequently  so  large  as  to  give  the  com- 
pany control  over  said  banks  or  trust  companies  or  at  least 


352        THE  PKINCIPLES  OP  LIFE  INSUKANCE 

a  heavy  representation  on  their  boards  of  directors.  This  sit- 
uation various  legislatures  considered  highly  undesirable. 
Life-insurance  companies,  it  was  felt,  are  organized  to  write 
insurance  and  not  to  engage  (by  virtue  of  stock  control)  in 
banking,  railroading,  and  other  business  enterprises. 

Cash  in  offices  and  banks. —  Although  amounting  in 
1890  to  over  4  per  cent,  of  the  total  assets,  this  item  had 
decreased  to  1.6  per  cent,  in  1913.  This  item  at  one  time 
also  lent  itself  to  much  abuse  on  the  part  of  certain  com- 
panies which  kept  large  sums  on  deposit  in  certain  financial 
institutions  with  which  their  officers  were  affiliated  at  a  rate 
much  below  that  assumed  for  premium  and  reserve  compu- 
tations. The  balances  at  present  are  not  disproportionate  to 
the  amounts  usually  kept  on  hand  in  most  other  lines  of 
business.  The  business  of  life  insurance,  we  have  seen,  is  so 
certain  in  its  financial  operations  that  it  is  unnecessary  for 
companies  to  retain  large  sums  in  cash.  It  should,  therefore, 
be  the  policy  of  a  well  managed  company  to  avoid  large 
cash  balances  by  investing  promptly  its  net  income. 

Unpaid  and  deferred  premiums. —  The  proportion  of 
assets  invested  in  this  form  was  only  1.4  per  cent,  at  the  close 
of  1913.  Very  few  businesses,  it  has  been  asserted,  "  carry  so 
little  in  uncollected  accounts/7 

Collateral  loans. —  Generally  speaking,  these  loans 
are  not  favored  by  the  companies  and  to-day  represent  the 
very  small  ratio  of  only  .4  per  cent.  Such  loans  are  much 
better  adapted  to  commercial  banks  than  to  investment  insti- 
tutions which  make  a  specialty  of  investing  in  bonds  and  real- 
estate  mortgages.  They  seldom  run  for  more  than  a  year  and 
in  many  instances  for  only  six  months,  require  frequent  re- 
newal, and  necessitate  an  adjustment  of  the  interest  to  meet 
current  rates.  The  collateral  required  usually  consists  of 
approved  railroad  bonds  and  standard  dividend-paying  stocks 
with  a  current  value  20  per  cent,  in  excess  of  the  amount 
loaned. 

Rate  of  Interest  Actually  Earned. —  Although  the  inter- 
est on  high-grade  investments  has  shown  a  decided  downward 


LIFE-INSUKANCE  INVESTMENTS  353 

tendency  during  the  past  thirty  years,  the  annual  return  on 
life-insurance  investments  still  averages  considerably  over 
4  per  cent.  According  to  the  1913  Insurance  Year  Book 
the  rate  of  interest  earned  on  the  mean  invested  funds  of 
twenty-nine  of  the  largest  American  companies  averaged  4.79 
per  cent,  for  the  five  years  from  1909  to  1913,  inclusive,  and 
4.76  per  cent,  for  the  twenty  years  from  1894  to  1913.  Of  the 
twenty-nine  companies  under  consideration  three  earned  an 
average  rate  exceeding  5%  per  cent,  during  the  years  1909- 
1913,  thirteen  5  per  cent,  or  over,  and  sixteen  between  4^ 
per  cent,  and  5  per  cent.  These  rates  clearly  show  that  life- 
insurance  companies  by  widely  diversifying  their  investments 
may  obtain  on  the  average  very  satisfactory  interest  re- 
turns on  their  funds  without  departing  from  the  principles  of 
conservative  investment. 

Method  of  Arriving  at  the  Rate  of  Earnings. —  Ordina- 
rily the  rate  of  interest  on  an  investment  is  ascertained  by  di- 
viding the  amount  of  interest  received  during  the  year  by  the 
amount  invested.  In  life  insurance,  however,  this  simple 
method  cannot  be  applied  since  the  companies  are  constantly 
increasing  their  funds  during  the  course  of  the  year,  partly 
because  the  payments  received  from  policyholders  exceed 
claims  and  other  expenditures  and  partly  because  interest 
earnings  are  constantly  coming  in  and  are  immediately  re- 
invested. In  other  words  the  funds  invested  at  the  end  of 
the  year  are.,  as  a  rule,  considerably  higher  than  the  funds 
invested  at  the  beginning  of  the  year,  and  it  is,  therefore, 
necessary  to  ascertain  the  rate  on  the  mean  invested  funds. 
While  there  is  no  one  method  universally  followed  by  the 
companies  in  this  respect,  the  general  plan  most  commonly 
used  has  been  explained  by  Mr.  Henry  Moir  as  follows : 4 

If  the  interest  earned  in  any  year  were  divided  by  the  funds 
invested  at  the  beginning  of  the  year,  then  those  companies 
which  had  a  large  increase  in  their  funds  would  appear  too 
favorably  in  the  comparison.  On  the  other  hand,  if  the  year's 

*  More,  HENRY,  Life  Assurance  Primer,  48. 


354       THE  PEINCIPLES  OF  LIFE  INSURANCE 

interest  were  divided  by  the  funds  at  the  end  of  the  year  the 
converse  would  hold.  For  measuring  the  interest  earned  by 
life-assurance  companies  a  middle  course  is  usually  followed, 
and  the  following  formula  has  been  suggested  as  a  good  basis, 
namely : 

Average  rate  earned  =  — — — — 

A  ~4—  _h>  —  1 

In  which  I  represents  the  total  interest  earned  during  the  year; 
A  the  funds  at  the  beginning  of  the  year;  and 
B  the  funds  at  the  end  of  the  year. 

BIBLIOGRAPHY 

DAWSON,  MILES  M.,  "  Investment  of  Funds,"  in  The  Business  of 
Life  Insurance,  chap.  27. 

DUNHAM,  SYLVESTER  C.,  "  Investments  by  Life  Insurance  Com- 
panies." A  lecture  delivered  before  Yale  University  on 
December  4,  1905. 

HIMER,  J.  W.,  "  Life  Insurance  Investments,"  published  by  the 
American  Academy  of  Political  and  Social  Science  in  its 
volume  on  "  Insurance,"  pp.  76-88. 

LUNGER,  JOHN  B.,  "Investment  of  Insurance  Funds."  Yale 
Insurance  Lectures,  i,  144-161. 

Proceedings  of  the  Sixth  Annual  Meeting  of  the  Association  of 
Life  Insurance  Presidents,  New  York,  1912. 

Report  of  the  New  York  Legislative  Insurance  Investigating 
Committee,  x,  382-392. 

ZARTMAN,  LESTER  W.,  The  Investments  of  Life  Insurance  Com- 
panies. New  York,  1906. 


CHAPTER  XXVII 
GOVERNMENT  SUPERVISION  OF  LIFE  INSURANCE 

Few  business  institutions,  if  any,  have  been  subjected  to 
such  strict  and  detailed  government  supervision  as  life  in- 
surance. The  reasons  for  this  become  clear  when  we  consider 
the  vital  relation  which  life  insurance  bears  to  the  family 
and  the  community.  We  have  seen  that  its  mission  is  a  sacred 
one,  that  the  trust  funds  it  holds  run  into  the  billions,  and  that 
millions  of  people  rely  upon  it  as  the  principal  means  of 
protecting  the  home  against  the  deprivations  occasioned  by 
premature  death.  The  great  majority  of  contracts,  as  already 
noted,  run  for  many  years  before  maturing  and  frequently 
involve  an  obligation  on  the  part  of  the  company  extending 
over  fifty  or  seventy-five  years. 

Yet  despite  the  almost  universal  use  of  life  insurance  and 
its  vital  importance  to  those  who  purchase  it,  very  few  per- 
sons, as  we  have  noted,  take  a  direct  interest  in  acquainting 
themselves  with  the  management  and  business  policy  of  the 
companies  in  which  they  are  insured.  In  practically  all 
cases  the  companies  are  controlled  by  a  limited  number  of 
persons  who  have  little  or  no  difficulty  in  securing  the  neces- 
sary proxies  to  perpetuate  their  control.  Even  assuming  that 
any  considerable  portion  of  the  vast  number  of  policyholders 
could  be  induced  to  take  an  interest  in  the  condition  of  the 
company  in  which  they  are  insured,  it  is  clear  that  very  few 
are  sufficiently  posted  in  life-insurance  matters  to  ascertain 
intelligently  the  true  state  of  affairs.  Life  insurance  is 
necessarily  a  technical  and  complicated  subject  and  the  real 
condition  of  a  company  can  only  be  determined  by  laborious 
and  expert  examination.  In  view  of  conditions  like  those 
just  recounted,  it  will  readily  be  admitted  that  life  insurance 

355 


356        THE  PRINCIPLES  OF  LIFE  INSURANCE 

is  a  fit  subject  for  some  sort  of  government  regulation  designed 
to  protect  the  public  adequately  against  mismanagement  and 
unjust  practices. 

State  Versus  Federal  Jurisdiction. —  In  the  United 
States  the  general  supervision  of  all  forms  of  insurance  is 
undertaken  solely  by  the  several  state  governments,  and  since 
many  of  the  larger  life-insurance  companies  transact  business 
in  all,  or  nearly  all,  of  the  states,  there  has  long  existed  a 
strong  movement  in  favor  of  supervision  by  the  federal  gov- 
ernment under  its  powers  to  regulate  interstate  commerce. 
The  United  States  Supreme  Court,  however,  beginning  with 
the  famous  case  of  Paul  v.  Virginia?  has  repeatedly  refused 
to  declare  an  insurance  contract  an  instrumentality  of  com- 
merce, and  has  asserted  the  doctrine  that  "there  is  no  doubt 
of  the  power  of  the  state  (using  that  term  as  contrasted  with 
the  federal  government)  to  prohibit  foreign  insurance  com- 
panies from  doing  business  within  its  limits.  The  state  can 
impose  such  conditions  as  it  pleases  upon  the  doing  of  any 
business  by  those  companies  within  its  borders,  and  unless  the 
conditions  be  complied  with  the  prohibition  may  be  absolute." 
In  the  absence  of  national  supervision  the  entire  oversight  of 
the  insurance  business  is  relegated  to  the  several  state  govern- 
ments, and  this  situation,  according  to  leading  authorities, 
can  only  be  changed  by  enabling  Congress  to  legislate  on  the 
subject  through  an  amendment  of  the  federal  Constitution. 
Under  existing  conditions,  therefore,  the  several  states  can 
prohibit  non-resident  companies  from  making  contracts  within 
their  borders,  except  upon  such  conditions  as  the  states  may 
prescribe,  and  it  follows  that  a  company  doing  business  in 
many  states  will  be  subject  to  the  supervisory  control  of 
numerous  separate  governments. 

Officials  Intrusted  with  Supervisory  Control  and  Their 
Duties  and  Powers. —  In  the  great  majority  of  states  super- 
visory control  over  insurance  companies  has  been  intrusted 
to  an  insurance  official,  usually  called  the  superintendent  or 

iPaul  v.  Virginia,  8  Wall.  168  (1868). 


GOVEKNMENT  SUPEKVISION  357 

commissioner  of  insurance,  who  is  either  appointed  by  the 
governor  or  elected  by  popular  suffrage,  and  who  is  placed  in 
charge  of  a  separate  department  of  the  government.  Uni- 
formity among  the  states  in  this  respect,  however,  does  not 
exist,  and  a  considerable  number  attach  the  responsibility  of 
supervising  insurance  companies  to  some  other  department  of 
the  government.  At  the  close  of  1913,  seven  states  still  in- 
trusted such  supervisory  control  to  the  state  auditor,  four  left 
it  to  the  secretary  of  state,  one  made  the  state  treasurer  the 
supervising  officer,  and  one  divided  the  control  between  the 
secretary  of  state  and  the  treasurer. 

Many  of  the  states  have  enacted  a  large  body  of  statute  law 
governing  insurance,  while  others  are  still  very  backward 
in  this  respect.  Although  the  legislatures  and  courts  of 
the  several  states  play  a  prominent  part  in  the  enactment 
and  interpretation  of  insurance  legislation,  the  actual  super- 
vision of  the  companies  and  the  enforcement  of  the  laws  is 
performed  by  the  insurance  commissioners.  These  officials 
are  usually  vested  with  large  discretionary  powers.  It  is  the 
duty  of  the  commissioner  to  see  that  all  insurance  laws  are 
properly  complied  with  and  that  all  the  companies  transacting 
business  in  the  state  are  solvent  according  to  some  prescribed 
standard.  His  permission  must  be  obtained  before  a  foreign 
company  can  enter  the  state,  or  before  an  agent  of  such  com- 
pany can  solicit  business.  Every  company  is  obliged  to  ren- 
der an  annual  statement  of  its  condition  and  business  in  the 
form  and  manner  prescribed  by  the  commissioner,  and  he 
has  also  the  power  to  require  at  any  time  statements  from 
the  officers  or  agents  of  any  company  operating  within  his 
state  on  any  matters  on  which  he  may  desire  to  be  informed. 
To  facilitate  examinations  he  is  empowered  to  require  free 
access  to  all  books  and  papers  of  any  company  or  agent  operat- 
ing in  the  state,  to  summon  and  examine  any  persons  under 
oath  relative  to  the  affairs  and  condition  of  any  such  company, 
or,  for  probable  cause,  to  visit  the  company  at  its  principal  of- 
fice for  the  purpose  of  investigating  its  affairs.  -Failure  or  re- 
fusal to  render  any  statement  required  within  the  time  and 


358        THE  PRINCIPLES  OF  LIFE  INSURANCE 

manner  prescribed  by  the  commissioner,  or  to  permit  any 
examination  requested,  subjects  the  company  to  heavy  money 
fines  or  to  the  danger  of  having  its  license  revoked.  His  other 
important  duties,  as  summarized  on  another  occasion  2  may 
be  stated  as  follows : 

Power  is  given  the  commissioner  to  suspend  the  entire  busi- 
ness of  any  company  by  revoking  or  suspending  its  license 
if  in  his  opinion  the  company  does  not  comply  with  any  pro- 
vision of  the  law,  or  whenever  its  assets  appear  to  him  insuf- 
ficient. He  must  see  that  the  company  has  made  the  proper 
deposits  of  approved  securities;  that  it  makes  a  correct  return 
of  the  taxes  which  are  imposed  by  law;  and  that  a  resident  of 
his  state  is  appointed  the  attorney  of  the  company  so  that  in 
the  event  of  litigation  legal  process  may  be  served  without  the 
citizens  being  obliged  to  go  outside  of  the  state  to  serve  the 
papers.  It  is  also  his  duty  to  see  that  the  assets  of  all  com- 
panies organized  in  the  state  are  properly  invested  in  the  form 
prescribed  by  law.  He  has  supervisory  power  over  the  organiza- 
tion of  all  companies  from  the  time  that  the  articles  of  agree- 
ment are  arranged  until  the  company  is  ready  to  begin  the 
writing  of  policies,  and  in  every  stage  of  the  organization  and 
in  all  matters  pertaining  thereto,  it  is  necessary  for  the  or- 
ganizers of  the  company  to  have  his  approval.  Finally,  he 
owes  it  to  the  public  as  well  as  the  companies  to  do  all  in  his 
power  to  exterminate  improper  or  unlawful  insurance  schemes. 
Numerous  other  duties  and  powers  might  be  enumerated,  but 
those  mentioned  will  suffice  to  show  that  the  insurance  com- 
missioner is  clothed  with  extraordinary  powers,  and  that  con- 
sequently the  personality  of  the  commissioner  is  a  factor  the 
importance  of  which  cannot  be  overestimated. 

Subject  Matter  to  Which  State  Legislation  Especially 
Applies. —  Having  outlined  in  a  general  way  the  duties  and 
powers  of  the  officials  intrusted  with  the  supervision  of  in- 
surance companies,  we  may  next  outline  in  detail  the  particu- 
lar functions  which  it  is  the  purpose  of  government  regula- 
tion to  perform  and  the. particular  subjects  and  practices  to 
which  it  is  applied.  While  space  forbids  a  detailed  discussion 

2HUEBNEB,  S.  S.,  Property  Insurance,  245-246. 


GOVEKNMENT  SUPERVISION  359 

of  all  the  legislation  which  has  been  adopted  in  the  different 
states,  practically  all  the  important  laws  may  be  grouped  con- 
veniently under  the  following  seven  heads : 

Standard  of  solvency. —  Companies  are  required  by 
law  to  charge  themselves  with  a  minimum  reserve  as  a  lia- 
bility. While  the  legal  reserve  requirement  is  not  uniform  in 
all  the  states,  it  may  be  said  that  nearly  all  the  leading  states 
require  companies  to  maintain  reserves  on  policies  issued  since 
about  1900  which  shall  at  least  be  equal  to  those  based  on  the 
American  Experience  table  of  mortality  with  interest  at  3% 
per  cent.  In  some  states  reserves  computed  on  a  4  per  cent, 
basis  are  acceptable,  while  in  others  the  companies,  if  they  base 
their  computations  on  an  interest  rate  lower  than  that  pre- 
scribed by  law,  are  obliged  to  hold  the  higher  reserves  that  re- 
*sult.  On  policies  issued  prior  to  about  1900  the  reserve  stand- 
ard is  usually  based  on  the  American  Experience  table  with 
4  per  cent,  interest. 

Organization  and  admission  of  companies. —  Al- 
though the  organization  of  insurance  companies  is  governed 
largely  by  the  law  applying  to  the  organization  of  corpora- 
tions in  general,  most  states  have  seen  fit  to  supplement  their 
general  corporation  law  with  special  acts  pertaining  only  to  in- 
surance companies.  Level-premium  companies  are  usually  re- 
quired to  deposit  with  the  state  approved  securities  to  the  value 
of  $100,000  or  some  other  designated  sum.  The  manner  of 
incorporating  companies  and  the  conditions  under  which  they 
can  begin  business  are  also  prescribed,  and  frequently  the 
retirement  of  the  guaranty  stock  of  a  mutual  company  and 
the  maximum  interest  return  that  the  holders  of  such  stock 
may  receive  are  fully  set  forth.  Much  of  the  legislation  in 
most  states  is  concerned  with  the  conditions  under  which 
foreign  companies  may  enter  the  state,  and  usually  relates  to 
their  ability  to  meet  their  obligations,  to  the  licensing  of  their 
agents,  and  to  the  filing  of  a  copy  of  their  charter,  a  certificate 
showing  that  they  are  authorized  to  transact  business,  a  copy 
of  all  their  policy  forms,  and  a.  complete  statement  of  their 
financial  condition ,  and  valuation  of  policies.  In  order  that 


360       THE  PRINCIPLES  OF  LIFE  INSURANCE 

legal  process  may  be  served.,  a  foreign  company  must  also  ap- 
point a  resident  of  the  state  its  attorney.  Various  states  also 
forbid  the  removal  of  suits  from  state  to  federal  courts. 

Publicity  through  annual  statements  and  examina- 
tions.—  All  states  require  the  companies  transacting  business 
within  their  borders  to  submit  annual  statements  relative  to 
their  operations  and  financial  condition.  These  statements, 
made  out  according  to  the  form  prescribed  by  the  insurance 
department,  usually  show  in  detail  the  company's  assets  and 
liabilities,  income  and  expenditures,  a  gain  and  loss  exhibit, 
a  schedule  of  all  classes  of  investments  by  kind  and  amount, 
and  an  exhibit  of  the  number  and  kind  of  policies  written 
during  the  year,  the  amount  and  kind  of  insurance  in  force, 
and  the  amount  of  insurance  terminated  in  various  ways.  The 
statements  thus  received  are  published  in  the  annual  reports 
of  the  insurance  departments  and  are  thus  available  to  the 
public  and  to  the  representatives  of  competing  companies. 
As  a  rule  the  statements,  as  adjusted  by  the  commissioner, 
must  also  be  published  a  designated  number  of  times  in  one  or 
more  daily  or  weekly  newspapers  of  general  circulation,  the 
companies  to  attend  to  the  details  of  publication.  To  fur- 
ther protect  the  public,  insurance  commissioners  are  authorized 
to  make  periodical  and,  for  probable  cause,  special  examina- 
tions of  the  affairs  of  the  companies,  and  to  publish  the  result 
of  such  examinations  whenever  they  deem  it  to  the  best  in- 
terests of  the  public  to  do  so.  The  periodical  examinations 
involve  an  appraisal  of  the  company's  assets,  a  determination 
of  its  liability,  and  an  inspection  of  its  books  and  records. 

Equitable  treatment  of  policyholders. —  Eeference 
is  had  here  chiefly  to  those  provisions  of  the  law  which  aim 
to  prevent  discrimination  and  misrepresentation,  to  standard- 
ize policy  provisions,  and  to  bring  about  economy  of  manage- 
ment. Discrimination  between  insurants  of  the  same  class 
and  equal  expectation  of  life,  as  to  rates,  benefits  or  conditions 
of  the  contract  is  prohibited  under  heavy  penalties  in  most 
of  the  states.  Nearly  all  the  states  also  prohibit  an  agent  or 
other  representative  of  a  company  from  giving,  as  an  induce- 


GOVERNMENT  SUPERVISION  361 

ment  to  insure,  any  direct  or  indirect  rebate  of  premiums 
payable  or  any  other  valuable  consideration  not  specified  in 
;he  contract.  In  this  connection  numerous  statutes  also  pro- 
libit  the  officers  and  representatives  of  any  company  from  giv- 
ing or  selling  as  an  inducement  to  insurance,  or  in  any  con- 
nection therewith,  any  stock  or  other  securities  of  any  insur- 
ance company. 

No  person  connected  with  any  life-insurance  company,  ac- 
cording to  the  law  of  many  states,  is  allowed  to  issue  or' cir- 
culate directly  or  indirectly,  any  estimate  or  statement  which 
misrepresents  the  terms,  benefits  and  advantages  of  any  policy 
which  his  company  issues,  or  the  dividends  to  be  paid  thereon. 
The  use  of  any  name  or  title  of  any  policy  which  misrepre- 
sents the  true  nature  thereof  is  likewise  prohibited.  Nor  may 
any  representative  of  a  company  resort  to  misrepresentation 
with  a  view  to  inducing  any  policyholder  in  another  com- 
pany to  lapse,  forfeit  or  surrender  his  insurance.  State- 
ments of  the  insured  are  declared  by  the  laws  of  some  states 
as  constituting  representations  and  not  warranties.3  Mis- 
representations are  not  considered  as  voiding  a  policy  unless 
the  same  are  of  material  importance.  Not  only  do  all  the 
states,  as  we  have  seen,  protect  the  insured  against  excessive 
forfeitures  in  case  of  surrender  and  lapse,  but  many  have  un- 
dertaken in  recent  years  to  adopt  certain  standard  policy  pro- 
visions ;  to  require  all  life  and  endowment  policies  to  contain 
or  to  exclude  certain  prescribed  provisions;  to  compel  com- 
panies to  print  prominently  on  the  face  of  the  policy  a  plain 
description  of  its  character,  dividend  periods  and  other  pe- 
culiarities, so  that  the  holder  thereof  shall  not  be  liable  to 
mistake  its  nature;  and  to  require  all  policy  forms  and  in- 
dorsements to  be  filed  with  and  approved  by  the  commis- 
sioner. Lastly,  it  should  be  stated  that  many  of  the  states 
have  shown  a  strong  disposition  to  regulate  the  expenses  of 
companies  and  to  prevent  the  accumulation  of  unnecessary 
surplus  funds.  To  this  end  laws  have  been  enacted  which  (1) 

3  For  a  discussion  of  representations  and  warranties,  see  pages  375 
to  379  of  this  volume. 


362       THE  PRINCIPLES  OF  LIFE  INSURANCE 

prescribe  the  methods  of  allotting  dividends;  (2)  prohibit  the 
payment  of  pensions,  political  contributions  and  excessive 
commissions ;  and  ( 3 )  place  a  limit  upon  salaries,  the  amount 
of  expense  which  may  be  incurred  to  secure  new  business, 
the  amount  of  surplus  that  may  be  withheld  from  policy- 
holders,  and  the  amount  of  new  business  that  may  be  writ- 
ten. 

Taxes  and  fees. —  A  study  of  the  insurance  laws  of 
the  different  states  shows  a  remarkable  absence  of  uniformity 
in  the  way  life-insurance  companies  are  taxed.  Some  states 
levy  the  tax  on  all  or  a  part  of  the  companies'  assets;  others 
tax  their  net  receipts;  but  by  far  the  greater  number  tax  the 
gross  premiums,  the  rate  varying  all  the  way  from  1  to 
3  per  cent.  In  addition  to  these  taxes  there  exists  a  great 
variety  of  license  fees,  fees  for  filing  charters,  statements 
and  other  papers,  and  in  some  states  municipal  license  fees.  A 
recent  compilation  showed  that  total  taxes  and  fees  paid  by 
life-insurance  companies  operating  in  the  United  States  ag- 
gregate annually  approximately  $12,000,000,  a  sum  consid- 
ered grossly  excessive  by  those  who  wish  to  see  the  state  en- 
courage the  widest  possible  dissemination  of  the  benefits 
of  life  insurance. 

The  present  heavy  taxation  of  life  insurance  is  attributable 
chiefly  to  general  ignorance  on  the  part  of  the  public  and 
the  lawmakers  of  the  true  nature  of  legal-reserve  insurance, 
and  to  the  fact  that  taxes  on  this  business,  especially  those 
levied  on  gross  premiums,  are  so  easily  collected.  Prob- 
ably not  more  than  one  out  of  every  twenty  policyholders 
understands  the  true  function  of  the  reserve.  The  general 
public  and  the  lawmakers  see  only  the  billions  in  assets  that 
are  being  accumulated,  and  naturally  conclude  that  such  huge 
funds  should  be  taxed  like  any  other  property,  overlooking 
the  intimate  relation  that  life  insurance  bears  to  the  welfare 
of  the  family  and  the  state,  as  well  as  the  fact  that  the  large 
reserves  referred  to  represent  merely  the  accumulations  of 
millions  of  policyholders  which  are  held  in  trust  for  them 
which  are  necessary  for  the  fulfillment  of  the  companies' 


GOVERNMENT  SUPERVISION  363 

obligations  to  the  insured  for  the  protection  of  his  wife  and 
children.  To  a  large  extent  the  heavy  tax  burden  is  also 
traceable  to  the  fact  that  as  regards  most  states  the  com- 
panies operating  therein  are  foreign  companies  and  for  that 
reason,  especially  when  it  is  believed  that  they  take  millions 
out  of  the  state,  are  not  regarded  as  entitled  to  leniency. 

.The  taxation  of  life-insurance  companies  has  long  been  a 
much  discussed  subject.  Among  students  of  the  question 
there  is  a  very  widespread  conviction  that  the  states  in  this 
country,  instead  of  repressing  the  growth  of  life  insurance 
through  excessive  taxation,  should  adopt  a  policy  of  encourag- 
ing the  widest  possible  use  of  its  beneficent  protection  among 
their  citizens  as  is  done  by  practically  all  other  leading 
civilized  nations.  The  supporters  of  this  view  take  the  posi- 
tion that  a  life-insurance  policy  in  itself  constitutes  a  self- 
imposed  tax,  and  that  it  cannot  properly  be  regarded  as  in- 
come-producing property.  Their  contention  is  that  life-in- 
surance policies  merely  represent  funds  accumulated  through 
the  sacrifice  of  the  insured  for  the  protection  of  dependents, 
and  thus  not  only  benefit  the  entire  community  but  relieve 
the  state  of  the  necessity  of  supporting  large  numbers  who 
would  otherwise  be  dependent  on  charity.  They,  therefore, 
hold  that  the  business  should  not  be  taxed  more  than  is  neces- 
sary to  pay  for  the  cost  of  its  proper  supervision. 

Other  main  subjects  covered. —  To  the  foregoing 
groups  of  subjects  two  others  should  be  added,  viz,  the  regula- 
tion of  investments  and  the  supervision  of  agents.  These, 
however,  need  not  be  discussed  here  since  the  first  was 
covered  in  the  chapter  on  "  Life-Insurance  Investments " 
and  the  second  will  be  treated  in  the  chapter  on  "  The  Law 
Pertaining  to  the  Agent." 

State  Supervision  in  Practice. —  Although  the  insurance 
departments  of  certain  leading  states  have  exercised  an  ef- 
ficient supervision  of  the  life-insurance  business,  this  cannot 
be  said  of  the  great  majority.  The  complaints  most  com- 
monly heard  against  the  present  system  of  regulation  refer 
to  the  results  which  are  the  necessary  outcome  of  supervision 


364        THE  PKINCIPLES  OF  LIFE  INSURANCE 

on  the  part  of  fifty-two  different  states  and  territories,  and 
which  grow  out  of  the  many  different  laws  enacted  and  the 
different  demands  and  rulings  of  the  insurance  commissioners. 
The  most  important  of  the  results  referred  to  may  be  de- 
scribed briefly.  Attention  has  already  been  directed  to  the 
heavy  taxation  imposed  by  the  states  and  the  lack  of  uniform- 
ity in  the  methods  of  taxation.  A  similar  lack  of  uniformity 
also  manifests  itself  in  the  other  legislation.  As  the  writer 
stated  on  another  occasion : 4  "  Each  year  witnesses  the  en- 
actment of  a  multitude  of  new  laws  by  the  state  legislatures; 
also  a  change  in  numerous  existing  laws,  as  well  as  the  intro- 
duction of  a  large  number  of  bills  never  intended  to  become 
law.  In  fact,  bills  affecting  the  interests  of  insurance  com- 
panies in  one  way  or  another  are  said  to  be  introduced  in  our 
state  legislature  at  the  rate  of  approximately  six  hundred  a 
year."  Another  result  growing  out  of  state  supervision  con- 
sists of  the  conflicting  rulings  of  the  different  state  courts 
on  almost  every  important  legal  phase  of  the  subject;  and 
the  rulings  of  the  state  courts,  again,  are  often  at  direct 
variance  with  those  of  the  federal  courts.  Attention  should 
also  be  called  to  the  abuse  of  unnecessarily  duplicating  ex- 
aminations at  the  expense  of  the  companies,  and  frequently  for 
no  other  reason  than  the  profit  of  the  examiner. 

State  Versus  National  Control. —  Life-insurance  officials 
are  almost  a  unit  in  believing  that  it  is  impossible  to  over- 
come the  difficulties  of  unifying  the  action  of  half  a  hundred 
legislative  bodies  and  the  same  number  of  supervising  of- 
ficials, and  therefore  favor  a  system  of  national  control  which 
will  eliminate  state  supervision  of  interstate  insurance.  They 
point  to  the  fact  that  the  proportion  of  life  insurance  writ- 
ten by  American  companies  in  the  states  where  they  were 
organized  is  surprisingly  small.  A  compilation  made  a  few 
years  ago  by  the  writer  shows  that  in  the  case  of  twenty 
leading  companies,  transacting  nearly  nine-tenths  of  the  total 
ordinary  life  insurance  in  the  United  States,  only  15.5  per 
cent,  of  the  total  amount  of  their  outstanding  policies  was  ob- 

*HUEBNER,  S.  S.,  Property  Insurance,  248. 


GOVERNMENT  SUPERVISION  365 

tained  in  the  home  state  and  only  12.6  per  cent,  of  the  total 
premium  income  was  derived  from  that  business.  Even  in  the 
case  of  the  four  largest  companies  domiciled  in  the  wealthy 
and  thickly  populated  state  of  New  York  less  than  one-fifth 
of  their  total  business  is  intrastate  and  over  four-fifths  is 
interstate  and  international. 

The  advocates  of  national  control  wish  to  have  the  federal 
government  assume  exclusive  regulatory  power  over  all  insur- 
ance transactions  between  the  states,  but  do  not  intend  to 
interfere  with  the  constitutional  right  of  each  state  to  super- 
vise its  own  home  companies  and  purely  intrastate  transac- 
tions. As  previously  stated,  national  supervision  cannot  be 
established  unless  the  Supreme  Court  of  the  United  States 
reverses  its  former  rulings  and  holds  insurance  to  be  com- 
merce, or,  as  an  alternative,  the  federal  constitution  is 
amended.  Aside  from  the  present  legal  obstacles  to  the  plan, 
the  advocates  of  national  control  believe  that  it  would  bring 
about  the  following  desirable  results : 

1.  Centralized  supervision  by  experts  would  provide  for  a 
much  greater  degree  of  publicity  and  would  protect  the  busi- 
ness against  sectional  and  retaliatory  legislation.     Not  only 
would  the  reports  to  and  the  examinations  of  the  federal 
supervising  department  entitle  a  company  to  admission  in  any 
state,  but  such  reports  and  examinations  would  carry  greater 
weight  in  both  this  and  foreign  countries.     The  present  lack 
of  uniform  insurance  legislation,  it  is  believed,  would  largely 
be  obviated,  and  relief  would  be  afforded  to  the  companies 
against  the  evils  resulting  from  variations  in  the  rulings  of 
numerous  insurance  commissioners.     It  is  also  argued  in  this 
connection  that  centralized  control  would  be  more  effective 
than  state  control  in  eliminating  fraudulent  insurance  con- 
cerns. 

2.  The  large  expense  connected  with  supervision  by  half  a 
hundred    separate    departments    would    greatly    be    avoided. 
Duplication  of  reports  and  examinations,  as  well  as  the  pub- 
lication of  voluminous  reports  all  of  which  contain  about  the 
same  information,  would  be  obviated.     Several  million  dollars 


366       THE  PRINCIPLES  OF  LIFE  INSURANCE 

of  wasteful  expense,  it  is  asserted,  might  be  saved  annually  in 
this  way. 

8.  A  more  equitable,  uniform  and  less  burdensome  policy 
of  taxation  than  now  exists,  it  is  hoped,  would  also  result.  As 
one  supporter  of  national  supervision  recently  remarked  con- 
cerning the  present  system  of  taxing  life-insurance  business :  & 
Under  the  system  of  state  taxation,  the  man  who  pays  his 
premiums  into  a  life-insurance  company  is  frequently  taxed 
twice,  and  in  some  cases  three  times.  That  such  burdens 
should  be  placed  upon  men,  because  having  to  provide  for  their 
families  they  must  needs  have  recourse  to  life  insurance,  is  a 
national  disgrace,  excused  only  on  the  ground  of  ignorance  of 
the  real  nature  of  the  business.  Since  much  of  this  taxation 
is  the  result  of  jealous  fear  of  the  states  that  the  others  are 
profiting  through  the  insurance  business  at  their  expense,  na- 
tional supervision  would  bring  at  least  partial  relief  from  this 
burden. 

BIBLIOGRAPHY 
DAWSON,  MILES  M.,  The  Business  of  Life  Insurance,  chaps.  31, 

32  and  33,  pp.  334-387. 
FACKLER,  EDWARD  B.,  "  Governmental  Supervision,"  Notes  on 

Life  Insurance,  chap.  24,  pp.  115-124. 

GEPHART,  W.  F.,  Principles  of  Insurance,  chap.  10,  "  The  Rela- 
tion of  the  State  to  Insurance,"  pp.  231-255. 
HARDISON,  F.  H.,  "  State  Supervision  of  Insurance,"  in  H.  P. 

Dunham's  The  Business  of  Insurance,  iii,  16-37. 
Insurance  Year  Book,  1913,  1-105.  This  portion  of  the  Year 
Book,  published  by  the  Spectator  Company,  furnishes  a 
synopsis  of  the  statutory  requirements  applying  to  old- 
line  companies,  assessment  associations  and  fraternal  or- 
ders. 

McCALL,  JOHN  A.,  "  The  Regulation  of  Life  Insurance  in  the 
United  States  and  Foreign  Countries."  Yale  Insurance 
Lectures,  i,  200-217. 

WOLFE,  S.  H.,  "  State  Supervision  of  Insurance  Companies. 
Annals  of  the  American  Academy  of  Political  and  Social 
Science,  xxvi,  137-152. 

ZARTMAN,  LESTER  W.,  Yale  Readings  in  Life  Insurance,  chaps. 
23-25,  pp.  312-381. 

s  ZARTMAN,    LESTER   W.,    "  Mistakes   in    State   Regulation,"    Yale 
Insurance  Readings,  i,  331. 


PAET  V 
IMPORTANT  LEGAL  PHASES  OF  LIFE  INSURANCE 


CHAPTER  XXVIII 

LEGAL  INTERPRETATION  OF  THE  POLICY  AND 
APPLICATION 

General  Rules  Underlying  Court  Decisions  Affecting 
Life  Insurance. —  Policy  forms  are  necessarily  general  in 
character,  and  are  drawn  to  meet  a  general  situation  and  not 
with  reference  to  particular  cases.  Yet,  it  is  apparent  that 
innumerable  instances  arise  which  require  a  special  interpre- 
tation of  the  general  terms  of  the  contract  in  order  to  realize 
the  essential  purpose  of  the  contract,  viz,  to  protect  against 
loss.  There  is  scarcely  a  provision  in  the  policy  to-day  which 
has  not  been  the  subject  of  interpretation  by  the  courts,  and 
there  are  few  provisions  concerning  which,  chiefly  because 
of  ambiguity  in  the  wording,  varying  circumstances  surround- 
ing the  loss,  or  statutory  requirements,  there  are  not  conflict- 
ing opinions.  Frequently  also  the  interests  of  the  insured 
seem  at  variance  with  the  interests  of  the  insurer,  with  the 
result  that  the  attitude  of  state  legislatures  has  often  been 
one  of  hostility.  Under  these  conditions,  it  is  to  be  expected 
that  disputes  will  frequently  occur  as  to  the  interpretation 
which  shall  be  given  to  the  general  provisions  of  the  policy 
when  unexpected  circumstances  surround  the  particular  loss. 
But  however  great  the  conflict  of  authority  has  become,  there 
are  certain  legal  principles  which  underlie  the  interpretation 
of  the  application  as  well  as  policy  provisions,  and  which  are 
kept  in  mind  by  the  courts  as  guiding  principles  in  their  efforts 
to  interpret  the  contract.  Briefly  summarized,  the  impor- 
tant principles  to  which  reference  is  had  are  the  following: 

1.  Unlike  fire-insurance  contracts,  life-insurance  policies, 
although  the  indemnification  of  the  value  of  the  human  life 
in  case  of  premature  death  should  be  their  essential  object, 

369 


370        THE  PRINCIPLES  OF  LIFE  INSURANCE 

cannot  be  regarded  by  the  courts  as  purely  contracts  of  in- 
demnity. Instead,  these  contracts  are  held  to  be  "contracts 
to  pay  a  certain  sum  in  the  event  of  death."  This  general 
ruling  has  an  important  bearing  upon  the  subject  of  insurable 
interest  in  life  insurance,  and  will  be  referred  to  further  in 
the  chapter  on  "Insurable  Interest."  The  chief  difficulty 
that  the  courts  have  encountered  in  disposing  of  this  legal 
phase  of  the  subject  seems  to  have  presented  itself  in  those 
cases  where  creditors  (or  persons  similarly  situated)  take  out 
policies  on  the  lives  of  their  debtors  with  a  view  to  securing 
the  indebtedness.  In  such  instances  some  leading  authorities 
hold  that  life-insurance  contracts  are  for  indemnity  only. 

2.  Whenever  the  wording  of  any  provision  in  the  contract 
permits  of  more  than  one  construction  the  courts  will  give 
the  benefit  of  the  doubt  to  the  insured  on  the  ground  that  the 
insured  is  obliged  to  take  the  form  of  policy  offered  by  the 
companies  and  which  was  framed  by  them  in  their  own  in- 
terest. Forfeitures  are  not  favored  by  the  courts,  and  con- 
flicting provisions  or  ambiguous  language  will,  therefore,  be 
so  construed  as  to  give  effect  to  the  contract.  As  the  United 
States  Supreme  Court  has  ruled : x  "  Where  a  policy  of  in- 
surance is  so  framed  as  to  leave  room  for  two  constructions, 
the  words  used  should  be  interpreted  most  strongly'  against 
the  insurer.  This  exception  rests  upon  the  ground  that  the 
companies,  attorneys,  officers,  or  agents  prepared  the  policy 
and  it  is  their  language  that  must  be  interpreted." 

Admitting  that  this  is  a  reasonable  rule  where  the  company 
is  free  to  frame  the  policy,  the  question  arises  as  to  whether 
this  same  ruling  should  be  applied  where  the  policy  form,  or 
portions  thereof,  are  prescribed  and  made  compulsory  by  law.2 
Judging  from  the  case  of  Matthews  v.  American  Central  Insur- 
ance Company  (154  N.  Y.  449),  which  decided  the  question 

1  Liverpool  Insurance  Company  v.  Kearney,  180  U.  S.  132. 

2  At  a  recent  date  New  York  and  Ohio  had  statutes  providing  for 
standard  clauses  in  life-insurance  policies,  while  a  number  of  other 
states  have  statutes  providing  for  standard  policies  which  "  may  be 
issued  and  delivered." 


POLICY  AND  APPLICATION  INTERPRETED      371 

favorably  to  the  insured  as  regards  the  New  York  Standard 
Fire  Policy,  it  would  seem  probable  that  a  similar  con- 
struction might  be  extended  to  standard  life-insurance  poli- 
cies.3 

3.  Since  policy  forms  are  necessarily  general  in  character 
and  cannot  meet  all  particular  contingencies,  although  this  is 
not  so  generally  true*  in  life  insurance  as  in  fire  and  other 
forms  of  property  insurance,  it  follows  that  special  or  written 
agreements  must  often  be  indorsed  on  the  contract  with  a 
view  to  modifying  the   original  terms  of  the  policy  form. 
Where  this  is  done,  it  is  a  universally  recognized  principle 
that  whenever  there  is  a  difference  in  meaning  between  any 
indorsement   and  the  policy  form  itself,  the   superimposed 
parts  of  the  contract,  whether  written,  stamped,  or  printed, 
control  the  regular  provisions  of  the  policy.     This  principle 
is  based  on  the  theory  that  indorsements  on  the  policy  must 
be  considered  as  later  in  date  than  the  policy  itself,  thus 
representing  the  latest  agreement  between  the  parties.     If 
ambiguity  exists  in  the  wording  of  any  such  indorsements, 
the  insured  must  again  be  given  the  benefit  of  the  doubt. 
Similarly,  if  the  written  portion  of  the   regular  policy  is 
inconsistent   with  the   printed  portion,  the   former   will   be 
upheld   since   it   refers   to   this   particular   contract   as   dis- 
tinguished from  the  general  form  which  the  parties  frequently 
do  not  bother  to  revise  in  conformity  with  the  written  por- 
tion. 

4.  In  the  absence  of  conflicting  provisions  or  ambiguity  in 

3  The  court  in  this  case  decided  that :  "  The  policy,  although  of 
the  standard  form,  was  prepared  by  the  insurers,  who  are  presumed 
to  have  had  their  own  interests  primarily  in  view,  and  hence,  when 
the  meaning  is  doubtful,  it  should  be  construed  most  favorably  to 
the  insured,  who  had  nothing  to  do  with  the  preparation  thereof. 
Moreover,  when  a  literal  construction  would  lead  to  manifest  in- 
justice to  the  insured  and  a  liberal  but  still  reasonable  construction 
would  prevent  injustice  by  not  requiring  an  impossibility,  the  latter 
should  be  adopted  because  the  parties  are  presumed,  when  the  lan- 
guage used  by  them  permits,  to  have  intended  a  reasonable  and  not 
an  unreasonable  result." 


372        THE  PKINCIPLES  OF  LIFE  INSUEANCE 

language,  however,  no  discretion  can  be  exercised  by  the 
court  to  modify  the  contract  in  such  a  way  as  to  bring  about 
an  adjustment  which  it  may  regard  as  more  just  than  the 
strict  enforcement  of  the  contract  as  it  stands. 

5.  Generally  speaking,  the  construction  of  the  contract  will 
be  according  to  the  laws  and  usages  of  the  place  where  the 
contract  is  made.4 

The  Application  and  Its  Interpretation. —  An  applica- 
tion for  life  insurance  may  be  defined  as  the  insured's  pro- 
posal to  the  insurer  for  protection,  and  may  be  considered  as 
the  beginning  of  the  policy  contract.  In  this  document  the 
applicant  is  required  to  give  true  answers  to  a  large  number 
of  questions,  relating  principally  to  his  personal  and  family 
history,  habits,  age,  total  insurance  already  taken  out,  and 
other  applications  for  insurance  which  are  either  pending  or 
have  been  postponed  or  refused.  The  policy  usually  stipulates 
that  insurance  is  granted  in  consideration  of  the  application 

*  In  discussing  this  rule  and  exceptions  thereto,  Richards  makes 
the  following  comments: 

"This  rule  is  peculiarly  appropriate  to  this  branch  of  the  law 
because  in  insurance  there  may  be  several  places  where  the  contract 
is  operative  —  one  place  for  the  payment  of  premiums,  another  for 
the  payment  of  loss,  and  a  third  for  the  location  of  the  subject  of 
insurance.  But  if  the  policy  provides  that  the  premiums  and  loss 
are  to  be  payable  at  the  home  office,  the  latter  place  would  seem  to 
be  the  place  of  performance,  and  there  would  in  that  case  be  cogent 
reason  for  holding,  in  analogy  to  the  general  rule,  that  its  law  is 
to  prevail  in  the  construction  of  the  policy.  It  is  often  important 
to  determine  by  what  law  the  validity  and  effect  of  the  policy  are 
to  be  governed,  because  the  statutory  provisions,  as  well  as  usages 
and  decisions,  relating  to  the  insurance  contract  vary  greatly  in 
different  states,  and  such  statutes  generally  have  no  extraterritorial 
effect. 

"  If  the  policy  provides  that  it  will  not  be  binding  until  counter- 
signed at  a  certain  agency,  the  agency  is  ordinarily  the  place .  of 
contract;  so  if  the  policy  is  sent  to  the  agent  for  delivery  on  receipt 
of  the  premium;  but  if  the  application  is  accepted  at  the  home 
office,  and  the  policy  mailed  from  there  to  the  applicant  in  another 
state,  the  home  office  will  be  the  place  of  contract.  As  a  general 
thing  the  contract  is  considered  made  where  the  last  act  necessary 
to  complete  it  is  done."  RICHAKDS,  GEORGE,  Treatise  on  the  Law  of 
Insurance,  113-114. 


POLICY  AND  APPLICATION  INTERPRETED      373 

for  the  policy,  which  is  declared  to  be  a  part  thereof,  and 
most  generally  contains  an  additional  clause  to  the  effect 
that  the  policy  and  the  application  therefor  (a  copy  of  which 
is  attached  to  the  policy  when  issued)  "  constitute  the  entire 
;  contract  between  the  parties."  At  a  recent  date  thirteen 
states  had  also  adopted  laws  requiring  the  annexation  of  ap- 
plications to  policies,  on  penalty  of  the  company  being  estopped 
tfrom  denying  the  correctness  or  truth  of  such  application; 
.while  eleven  states  have  adopted  statutes  requiring  every  policy 
to  contain  the  entire  contract  between  the  parties  and 
forbidding  the  incorporation  therein  by  reference,  of  any  rules, 
application  or  other  writings  unless  the  same  are  indorsed 
upon  or  attached  to  the  policy  when  issued.  Since  the  ap- 
plication is  the  basis  of  the  policy  contract,  and  especially  in 
view  of  the  fact  that  the  answers  to  the  questions  contained  ' 
therein  are  frequently  warranted  by  the  applicant  to  be 
[irue,  it  is  important  to  note  the  attitude  of  the  courts  in  con- 
struing disputes  that  grow  out  of  misstatements  made  by  the 
applicant.  The  facts  in  this  respect  may  be  conveniently 
summarized  under  the  following: 

1.  Statements  as  to  health,  freedom  from  disease, 
habits,  and  medical  attendance. —  An  unusually  large  number 
'of  decisions  have  been  rendered  in  connection  with  such 
statements,  owing  principally  to  the  varying  phraseology  used 
by  the  companies  in  formulating  the  questions.  While  much 
depends  upon  the  exact  phraseology  used  in  determining 
whether  or  not  the  contract  has  been  violated,  the  courts  have 
generally  taken  the  view  that  the  expression  "  good  health," 
;or  words  to  that  effect,  does  not  preclude  indispositions  but 
means  freedom  from  such  diseases  or  ailments  as  tend  to  un- 
dermine the  general  healthfulness  of  the  system.5  If  such 
words  as  "  to  the  best  of  my  knowledge  or  belief  "  are  used  to 
qualify  the  applicant's  answers,  the  insurer,  in  order  to  avoid 
the  policy,  must  show  that  the  insured  acted  in  bad  faith  and 
had  actual  knowledge  of  the  facts.  But  as  Richards  points 

5  Plumb  v.  Pennsylvania,  etc.,  Insurance  Company,   108  Mich.  94, 
65  N.  W.  611. 


374       THE  PKINCIPLES  OF  LIFE  INSURANCE 

out :  "  Without  such  qualifying  words,  where  the  answer  of 
the  applicant  is  made  in  good  faith  and  relates  to  an  unknown 
and  obscure  disease,  or  to  a  long  list  of  diseases,  some  of 
them  obscure,  the  courts  are  disposed  to  construe  the  answer 
as  relating  to  matter  of  opinion,  of  the  applicant  rather  than 
to  matter  of  fact."  6 

Answers  relating  to  habits,  while  regarded  by  the  courts 
as  matters  of  fact  rather  than  opinion,  have  in  many  in- 
stances been  construed  leniently,  as  may  for  example  be 
judged  from  the  expression  of  opinion  of  the  United  States 
Supreme  Court  that  one  occurrence  of  delirium  tremens  does 
not  necessarily  violate  a  warranty  covering  temperate  habits.7 
Similarly,  the  courts,  while  holding  that  untrue  answers  to 
questions  relating  to  medical  attendance  or  consultation  with 
physicians  invalidate  the  policy,  will,  whenever  possible,  es- 
pecially if  the  questions  are  in  the  least  ambiguous,  interpret 
the  language  favorably  to  the  insured. 

2.  Statements  relating  to  family  relationships  and 
family  history. —  Untrue  answers  of  the  applicant  to  ques- 
tions relating  to  his  family  relationships  have,  in  nearly  all 
instances,  been  held  to  invalidate  the  policy.     With  respect 
to  family  history,  however,  the  courts  have  shown  reluctance 
to  nullify  a  policy  where  the  insured's  incorrect  answers  were 
not   made   in   bad   faith.     In  other   words   the   courts  have 
manifested  a  strong  tendency  to  construe  statements  of  this 
class,  if  made  in  good  faith,  as  mere  representations  or  mat- 
ters of  opinion  on  the  ground  that  such  questions  are  in  the 
mature   of   collateral   inquiries   and   that  the   applicant   can 
Aardly  be   expected   to   keep   himself   thoroughly  posted   as 
regards  the  ages  at  death,  the  condition  of  health  during 
fife,  and  the  causes  of  death,  of  his  relatives  and  ancestors. 

3.  Statements  relating  to  the  age  of  the  applicant. 
—  It  must  be  apparent  that  the  insurer  is  entitled  to  a  cor- 
rect statement  of  the  insured's  age,  since  the  rate  of  premium 
is  based  on  that  age.     In  the  absence  therefore  of  any  policy 

e  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance,  482. 
7  Insurance  Company  v.  Foley,  105  U.  S.  350. 


POLICY  AND  APPLICATION  INTERPUKTKJ)     :\7'> 

provision  relating  to  the  matter,  the  courts  have  consistently 
held  that  an  understatement  of  age  increases  the  risk  as  a  mat- 
ter of  law  and  will  void  the  policy.  Such  a  harsh  conse- 
quence is  avoided  to-day  by  a  clause  which  provides  for  an 
adjustment  by  stipulating  that  "  if  the  age  of  the  insured  has 
been  misstated,  and  the  error  shall  not  have  been  adjusted 
during  his  lifetime,  the  amount  payable  hereunder  shall  be 
such  as  the  premium  paid  would  have  purchased  in  the  correct 
age."  Some  thirteen  states  have  also  provided  by  statute  for 
a  similar  adjustment  of  errors  in  age. 

4.  Statements  relating  to  other  insurance  and  to 
rejected,  or  postponed  applications. —  The  importance  of  in- 
quiries along  these  lines  as  a  means  of  preventing  over- 
insurance  and  uncovering  or  preventing  attempts  at  fraud 
is  obvious,  and  false  answers  to  such  inquiries  have  been  con- 
sistently held  to  invalidate  the  policy.  The  only  question 
of  importance  in  this  respect,  concerning  which  court  decisions 
do  not  agree,  is  whether  the  term  "other  insurance,"  when 
used  in  the  application  of  a  regular  insurance  company,  in- 
cludes certificates  issued  by  and  applications  made  to  fraternal 
and  mutual  benefit  societies.  Most  of  the  cases  rendered 
take  the  position  that  only  policies  or  applications  in  regular 
companies  are  included  in  the  inquiry,  although  some  of  the 
courts  regard  fraternal  orders  and  other  benefit  societies  as 
insurance  concerns  and,  therefore,  consider  membership 
therein  as  "other  insurance."  The  doubt  occasioned  by 
this  conflict  of  legal  opinion,  can,  however,  easily  be  overcome 
by  making  the  inquiry  in  the  application  specifically  cover 
benefit  certificates  as  well  as  other  insurance  in  companies. 
Warranties  and  Representations. —  A  policy  contract  be- 
ing based  upon  the  answers  to  the  questions  contained  in  the 
application,  it  follows  that  material  misstatements  by  the 
applicant  should  place  him  in  the  moral  position  of  one  who 
secures  a  thing  of  value  through  misrepresentation  and  false 
pretense.  In  many  instances,  however,  the  tendency  of  court 
decisions  has  been  in  the  direction  of  protecting  the  insured 
by  giving  him  the  benefit  of  the  doubt  wherever  possible  and 


376       THE  PBINCIPLES  OF  LIFE  INSURANCE 

by  placing  favorable  constructions  upon  the  "  materiality " 
of  inquiries  contained  in  the  application.  For  this  reason 
many  life-insurance  policies  contain,  and  according  to  the 
views  of  many  authorities  should  contain,  a  "  warranty  clause  " 
in  which  the  truth  of  his  statements  is  warranted  by  the 
applicant.  Thus  some  life  policies  call  attention,  not  merely 
once  but  several  times,  and  usually  in  special  print,  to  the 
fact  that  answers  in  the  application  are  made  a  part  of  the 
contract  and  shall  have  the  effect  of  warranties.  By  this 
practice  the  companies  aim  to  give  added  force  to  the  in- 
formation furnished  in  the  application  with  a  view  to  pro- 
tecting themselves  as  fully  as  possible  against  fraud  and 
against  the  difficulty  of  proving  the  materiality  of  inquiries 
to  the  satisfaction  of  a  jury.  Such  references  are  also 
common  in  the  policies  of  many  other  types  of  insurance,  and 
in  probably  no  business  is  the  emphasis  on  warranties  so 
frequent  as  in  insurance.  Thus,  the  standard  fire  policy 
provides  that  "  if  an  application,  survey,  plan,  or  description 
of  property  be  referred  to  in  this  policy  it  shall  be  a  part 
of  this  contract  and  a  warranty  by  the  insured."  The  marine- 
insurance  contract  also  furnishes  a  striking  illustration  of 
numerous  provisions  and  indorsements  which  are  declared  in 
the  contract  to  be  warranties. 

Definition  of  Warranties  and  Importance  of  the  Same 
to  Companies. —  This  brings  us  to  the  distinction  between 
"representations"  and  "warranties"  and  the  reason  for 
emphasizing  the  distinction.  A  statement  by  the  insured,  if 
construed  merely  as  a  representation,  need  be  only  "  sub- 
stantially correct,"  and  before  a  forfeiture  of  the  contract 
can  occur  because  of  the  incorrectness  of  the  statement,  the 
insurer  must  not  only  prove  the  statement  false  but  must 
show  that  such  falsehood  was  of  material  consequence.  "  Ma- 
teriality," the  courts  have  usually  decided,  is  measured  by 
the  following  consideration :  Was  the  inaccuracy  or  false- 
hood of  such  material  impoitance  as  to  have  induced  the 
company,  had  the  information  been  correct,  to  have  declined 
the  risk  or  to  have  altered  the  rate? 


POLICY  AND  APPLICATION  INTERPRETED      377 

If,  on  the  contrary,  statements  are  construed  as  warranties, 
they  must  be  "  absolutely  and  literally  true  "  and  a  forfeiture 
will  result,  unless  policy  provisions  stipulate  to  the  contrary, 
if  merely  the  falsehood  of  the  statement  can  be  shown,  ir- 
respective of  the  materiality  of  the  same.  In  other  words,  if 
statements  are  construed  as  warranties  the  insurer  is  re- 
lieved of  the  burden,  usually  a  difficult  one  in  jury  trials,  of 
proving  materiality,  and  is  obliged  simply  to  establish  the 
incorrectness  of  the  statement.'  As  is  well  stated  in  one 
case :  "  The  purpose  in  requiring  a  warranty  is  to  dispense 
with  inquiry,  and  cast  entirely  upon  the  assured  the  obliga- 
tion that  the  facts  shall  be  as  represented.  Compliance  with 
this  warranty  is  a  condition  precedent  to  any  recovery  upon 
the  contract.  It  is,  therefore,  that  the  materiality  of  the 
thing  warranted  to  the  risk  is  of  no  consequence." 

Classification  of  Warranties  and  Manner  of  Stating  the 
Same. —  Warranties  may  be  either  affirmative  or  promissory, 
while  in  certain  forms  of  property  insurance  importance  is 
also  attached  to  "implied  warranties,"  i.e.  those  which  are 
understood  to  exist  in  every  case  although  no  reference  may 
have  been  made  thereto  in  the  contract.  Affirmative  war- 
ranties refer  to  facts  or  situations  which  exist  either  before 
or  at  the  time  of  the  issuance  of  the  contract;  while  those 
that  are  promissory  refer  to  matters  which  should  or  should 
not  be  transacted  during  the  time  that  the  contract  is  in 
force. 

No  special  form  of  wording  is  necessary  to  make  a  state- 
ment a  warranty.  The  courts  have  generally  taken  the  po- 
sition that  the  presence  or  absence  of  the  word  "war- 
ranted" is  not  conclusive  in  this  respect.  Warranties,  how- 
ever, must  form  a  part  of  the  contract,  and  where  policies 
aim  to  state  explicitly  the  various  provisions  upon  which 
the  validity  of  the  contract  depends,  as  is  the  case  in  life 
insurance,  the  courts  have  shown  a  reluctance  to  consider 
statements  as  warranties  unless  they  are  expressly  denned 
as  such.  As  summarized  by  Richards :  "  A  statement  in 
an  extraneous  paper  merely  referred  to  in  the  policy  is  not  a 


378        THE  PKINCIPLES  OF  LIFE  INSURANCE 

warranty ;  but  if  the  policy,  and  such  is  usually  the  case  with 
the  life  policy,  makes  the  application  a  part  of  the  contract, 
and  the  basis  of  the  undertaking,  then  the  statements  of  fact 
or  stipulations  therein  contained,  whether  relating  to  the  past, 
present,  or  future,  become  warranties."  8  It  may  be  added 
that  the  general  rules  applied  in  the  construction  of  the  in- 
surance contract  also  apply  to  the  construction  of  warranties, 
and  that  in  interpreting  the  same  the  courts  lean  towards 
the  insured  wherever  latitude  is  possible  because  the  meaning 
of  the  warranty  is  surrounded  by  doubt  or  ambiguity. 

State  Statutes  Relating  to  Warranties. —  Because  of  the 
hardship  and  injustice  which  the  technical  enforcement  of 
the  common  law  rule  pertaining  to  warranties  might  some- 
times cause,  and  also  largely  because  there  was  a  time  when 
certain  insurance  companies  took  undue  advantage  of  war- 
ranties in  their  policies  as  a  means  of  bringing  about  a  tech- 
nical forfeiture  of  the  contract,  a  considerable  number  of 
states  have  passed  statutes  which  protect  the  insured  against 
technical  avoidance  of  the  contract  because  of  statements 
which  he  may  have  made,  unless  the  same  relate  to  a  matter 
material  to  the  risk  or  were  made  with  fraudulent  intent. 
In  other  words  such  statutes  make  warranties  representa- 
tions. In  some  instances  the  statutes  go  so  far  as  to  provide 
that  there  shall  be  no  forfeiture  unless  the  violation  of  the 
policy  condition  occasioned  the  loss  or  resulted  in  materially 
increasing  the  risk. 

At  a  recent  date  seven  states  had  statutes  which,  while 
differing  in  their  wording,  amounted  in  substance  to  the  New 
York  statute :  "  All  statements  purporting  to  be  made  by 
the  insured  shall  in  the  absence  of  fraud  be  deemed  repre- 
sentations and  not  warranties."  Twenty-one  states  have 
passed  statutes  which  aim  to  guard  against  technical  for- 
feitures by  providing  that  misrepresentations  shall  not  nullify 
the  contract  unless  made  in  matters  material  to  the  risk. 
These  statutes  usually  read  to  the  following  effect:  "No 

s  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance,  139. 


POLICY  AND  APPLICATION  INTERPKETED      379 

written  or  oral  misrepresentation,  or  warranty  therein  made, 
in  the  negotiation  of  a  contract  or  policy  of  life  insurance, 
or  in  the  application  therefor  or  proof  of  loss  thereunder 
shall  defeat  or  void  the  policy,  or  prevent  its  attaching,  un- 
less the  matter  misrepresented  increases  the  risk  of  loss." 

Statutory  provisions,  such  as  those  referred  to  in  the  pre- 
ceding paragraph,  have  been  declared  constitutional  and 
obligatory  by  both  the  United  States  Supreme  Court,9  and 
various  state  supreme  courts,  and  therefore  control  all  policies 
issued  subsequently  to  the  enactment  of  the  law.  They  are 
supported  by  many  writers  on  the  ground  that  most  policy- 
holders  are  ignorant  of  the  true  significance  of  warranties, 
and  that  many  may  thus  incur  a  technical  forfeiture  of  the 
contract  through  inadvertent  misstatements  in  their  applica- 
tions. 

The  Incontestable  Clause. —  The  severity  of  warranties  is 
also  greatly  alleviated  by  the  general  practice  of  the  com- 
panies making  their  policies  incontestable  after  one  or  two 
years  following  the  date  of  issue,  except  for  the  non-payment 
fof  premiums.  So-called  "  incontestable  clauses  "  usually  read 
I  to  the  following  effect :  "  This  policy  shall  be  incontestable 
after  one  year  from  its  date  except  for  non-payment  of  pre- 
mium." 10  Such  clauses  represent  a  clear  illustration  of 
the  modern  tendency  on  the  part  of  the  companies  to  liber- 
alize their  contracts,  and  much  can  be  said  in  their  favor. 
From  the  standpoint  of  the  insured  and  the  beneficiary  such 
clauses  remove  the  fear  of  law  suits  especially  at  a  time  — 
namely,  after  the  death  of  the  insured  —  when  it  may  be 

9  John  Hancock  Mutual  Life  Insurance  Company  v.  Warren,  181 
\  U.  S.  73. 

10  The  time  limit  stated  in  the  clause  varies  in  different  policies 
from  one  to  five  years,  although  one  year  is  the  limitation  most 
frequently  applied.     According  to  the  standard  provisions  required 
by  the  laws  of  New  York,  incontestability  is  authorized  either  from 
its  date  or  after  one  or  two  years.     Some  clauses  also  specify  other 
exceptions  than  non-payment  of  premiums  as,  for  example,  misstate- 
ment  of  age,  fraud  in  procuring  the  contract,  and  prohibited  occu- 
pations or  residence. 


380       THE  PEINCIPLES  OF  LIFE  INSUKANCE 

difficult  for  the  beneficiary  successfully  to  combat  with  com- 
petent testimony  the  company's  charge  of  a  violation  of 
the  contract.  From  the  standpoint  of  the  solicitor  the  exist- 
ence of  the  clause  increases  business  by  making  the  policy 
attractive  to  the  public.  Again,  from  the  standpoint  of  pub- 
lic policy  it  is  undesirable  to  have  widows,  children  or  other 
dependents  protected  by  a  contract  which  throughout  the 
lifetime  of  the  insured  may  be  subject  to  forfeiture,  pos- 
sibly for  trivial  violations,  which  forfeiture  might  remain 
unknown  until  the  death  of  the  insured,  and  thus  leave 
the  dependents  without  the  protection  which  it  is  the  essential 
purpose  of  life  insurance  to  give.  Moreover,  if  policies  can 
be  contested  at  the  time  of  the  insured's  death,  the  issue 
must  be  determined  in  the  courts,  thus  involving  long  delay 
in  the  settlement  of  the  claim  at  the  very  time  when  the  need 
for  speedy  payment  is  greatest.  Considerations  like  these 
have,  no  doubt,  been  responsible  for  the  requirement  of  in- 
contestable clauses  in  life-insurance  policies  by  the  statutes 
of  no  less  than  eleven  states. 

In  view  of  the  aforementioned  reasons  the  incontestable 
clause  should  be  regarded  as  a  conspicuous  feature  of  the 
policy  contract,  and  may  be  considered  as  similar  to  a  short 
statute  of  limitation.  By  inserting  this  policy  provision  the 
company  undertakes  to  make  all  necessary  investigations  con- 
cerning the  good  faith  and  all  other  circumstances  sur- 
rounding the  insured's  application  within  the  time  limit  stip- 
ulated in  the  clause.  The  company  also  definitely  agrees 
not  to  resist  the  payment  of  the  claim  if  there  has  been  no 
violation  of  the  contract  during  the  first  year  (or  whatever 
the  time  limit  may  be)  following  the  issuance  of  the  policy 
and  if  during  that  time  the  company  has  taken  no  action  to 
rescind  the  contract.  It  is  understood,  however,  that  the 
clause  does  not  waive  any  of  the  remedies  or  provisions  which 
the  contract  provides  must  be  complied  with  by  the  claimant 
following  the  death  of  the  insured. 

The  wording  of  the  clause  would  seem  to  make  the  policy 
incontestable  for  any  reason  whatsoever,  except  for  non-pay- 


POLICY  AND  APPLICATION  INTEKPRETED      381 

merit  of  the  premium  or  such  other  particulars  as  may  be 
stipulated  in  the  policy.11  In  fact  the  courts  have  shown  a 
decided  tendency  to  hold  uppermost  in  mind  the  interests 
of  innocent  beneficiaries,  and  to  this  end  have  quite  generally 
.adopted  the  rule  that  the  clause  prevents  the  insurer  from 
setting  up  a  defense  of  fraud,  suicide  or  death  at  the  hands 
of  justice.  Lack  of  insurable  interest,  however,  has  been 
considered  a  necessary  exception.  Such  an  interest,  as  will 
be  explained  later,  is  necessary  owing  to  considerations  of 
public  policy.  Therefore,  it  has  been  held  that  the  absence 
of  such  an  interest  will  cause  the  policy  to  fall  even  though 
it  contains  an  incontestable  clause.12 

The  Suicide  Clause. —  Owing  to  the  difficulty  of  defining 
clearly  the  term  "  suicide,"  insurance  companies  now  protect 
themselves  by  including  some  such  clause  as  the  following  in 
their  contracts:  "If  within  one  year  from  the  date, hereof 
the  insured  shall,  whether  sane  or  insane,  die  by  his  own 

11  In  this  respect,  as  pointed  out  by  Richards:  "Two  pertinent 
and  distinct  questions  are  presented  for  the  determination  of  the 
courts  in  connection  with  this  subject;  first,  what  does  the  language 
of  the  clause  fairly  mean?  second,  if  it  is  so  worded  as  to  include 
fraud,  is  the  provision  so  far  opposed  to  public  policy  as  to  be  void 
to  that  extent?  The  answer  to  the  first  question  is  clear.  Fraud 
when  not  among  the  exceptions  is  covered.  In  disposing  of  the 
second  question,  the  courts  have  very  generally  concurred  that  the 
clause  is  not  invalid  though  intended  to  cover  fraud,  and  that  the 
company  is  not  excused  from  payment  because  of  fraud  in  procuring 
the  policy,  or  for  breach  of  warranty,  intentional  or  unintentional, 
provided  it  seeks  no  relief  until  after  the  expiration  of  the  period 
of  limitation  specified  in  its  contract."  (Page  533.) 

Again  he  states:  "The  insurer  makes  whatever  examination  he 
chooses  to  make  before  closing  his  engagement  and  commands  meth- 
ods of  getting  at  the  material  facts  with  a  measure  of  thoroughness 
and  accuracy.  Now  and  again  he  may  be  seriously  deceived  by  an 
applicant;  nevertheless  it  is  more  important  that  millions  of  honest 
families  should  purchase  peace  of  mind  and  immunity  from  litiga- 
tion than  that  insurers  should  be  given  a  longer  and  better  oppor- 
tunity of  detecting  and  taking  advantage  of  occasional  fraud  which 
in  their  own  interest  they  have  expressly  agreed  to  ignore."  (Page 
534.) 

12  Clement  v.  Insurance  Company,  101  Tenn.  22, 


382       THE  PRINCIPLES  OF  LIFE  INSURANCE 

hand,  the  liability  of  the  company  under  this  policy  shall  bei 
limited  to  the  amount  of  the  reserve  hereon."  Such  a  limi- 
tation upon  the  company's  liability  the  courts  have  generally 
construed  as  reasonable,  and  as  Elliott  concludes :  "  Under 
it  the  insurer  is  not  liable,  although  the  insured  kills  himself 
while  in  a  condition  which  renders  him  wholly  unconscious 
of  the  moral  nature  of  the  act." 13  Full  support  of  this 
view  has  been  given  by  the  United  States  Supreme  Court 
which  decided  in  a  leading  case  14  that  "  for  the  purpose  of 
this  suit  it  is  enough  to  say  that  the  policy  was  rendered 
void,  as  the  insured  was  conscious  of  the  physical  nature  of 
his  act  and  intended  by  it  to  cause  his  death  although,  at 
the  time,  he  was  incapable  of  judging  between  right  and 
wrong  and  of  understanding  the  moral  consequences  of  what 
he  was  doing." 

Accidental  self-destruction,  however,  cannot  be  regarded 
as  coming  within  the  scope  of  the  modern  suicide  clause; 
in  fact,  cannot  be  considered  as  suicide  at  all.  Moreover, 
in  case  of  doubt  as  to  whether  the  death  occurred  through 
suicide  or  accident,  the  presumption  is  always  in  favor  of 
accident.  The  company  also,  when  raising  the  defense  of 
suicide,  "  whether  sane  or  insane,"  must  assume  the  burden 
of  proving  conclusively  that  the  case  is  one  of  intentional 
self-destruction. 

Other  Policy  Provisions, —  Life-insurance  contracts  some- 
times contain  other  provisions  which  limit  the  liability  of 
the  company.  Reference  is  had  to  prohibitions  or  restrictions, 
not  already  referred  to  in  previous  chapters,  which  relate  to 
the  insured's  occupation  after  the  issuance .  of  the  policy, 
residence  and  travel,  military  and  naval  service  in  time  of 
war,  intemperance,  death  while  violating  law,  or  death  at  the 
hands  of  justice.  Relative  to  these  restrictions  the  tendency 
has  been  towards  a  liberalization  of  the  contract.  Public 
opinion  has  favored  a  policy  which  is  not  loaded  down  with 
unnecessary  restrictions,  and  the  aforementioned  instances; 

is  ELLIOTT,  CHARLES  B.,  Treatise  on  the  Law  of  Insurance,  412. 
i*  Bigelow  v.  Berkshire,  etc.,  Insurance  Company,  93  U.  S.  284 


POLICY  AND  APPLICATION  INTERPRETED     383 

are  the  exception  and  not  the  rule.  It  may  also  be  accepted 
as  a  principle  that  whatever  is  not  prohibited  or  restricted  in 
the  policy  becomes  an  implied  privilege  to  the  insured,  es- 
pecially where  the  policy  contains  an  incontestable  clause.15 

is  In  discussing  the  incontestable  clause,  Richards  makes  the  fol- 
lowing significant  comments :  "  If  the  general  incontestable  clause 
bars  the  insurance  company  from  setting  up  in  defense  the  act  of 
suicide,  even  when  committed  by  a  sane  man,  it  is  difficult  to  dis- 
cover any  sufficient  reason  for  allowing  the  company  to  except  from 
its  application,  the  death  of  the  insured  by  legal  sentence  and  execu- 
tion for  crime.  The  act  of  suicide,  it  may  often  be  shown,  is  com- 
mitted with  the  express-  purpose  of  hastening  payment  of  the 
insurance  money;  whereas  it  rarely  appears  that  the  insured  is 
actuated  by  any  thought  of  insurance  on  his  own  life  when  per- 
suaded to  commit  crime.  So  far  as  innocent  beneficiaries  are  con- 
cerned the  reasons  for  allowing  them  to  take  their  insurance  money 
are  no  stronger  in  case  of  suicide  than  in  the  case  of  legal  execution; 
and  so  far  as  the  insurance  company  is  concerned  it  shows  no  equity 
in  its  own  favor  in  either  case  inasmuch  as  it  has  expressly  con- 
tracted by  the  clause  in  question  to  raise  no  such  defense.  .  .  . 

"  Where  beneficiaries,  as  well  as  insurer,  are  in  no  wise  respon- 
sible for  hastening  the  date  of  maturity,  it  is  not  altogether  clear, 
that  in  disregard  of  the  express  terms  of  the  contract  the  insurer 
should  be  so  unexpectedly  favored,  and  the  beneficiaries  so  heavily 
penalized.  Premiums  are  often  paid  for  many  years,  and  at  great 
sacrifice,  a  sacrifice  felt,  perhaps,  by  all  the  members  of  the  house- 
hold. Before  leaving  the  insurance  moneys  with  the  company  and 
depriving  innocent  widows  and  children  of  their  natural  means  of 
support,  in  violation  of  the  terms  of  the  contract,  the  courts  must 
be  convinced  that  the  general  welfare  of  the  community  will  thereby 
be  promoted.  Accordingly  it  is  not  surprising  that  the  drift  of 
opinion  in  the  state  courts  is  in  the  direction  of  extending  the 
operation  of  the  incontestable  clause  to  the  fullest  protection  of 
innocent  beneficiaries."  RICHARDS,  GEORGE,  Treatise  on  the  Law  of 
Insurance,  536. 


CHAPTER  XXIX 
INSURABLE  INTEREST 

A  contract  of  life  insurance  must,  according  to  law,  be  sup- 
ported by  an  interest  in  the  continuance  of  the  life  of  the 
insured.  Such  an  "insurable  interest"  may  assume  hun- 
dreds of  forms  and  may  have  its  origin,  as  we  shall  see,  in  a 
great  variety  of  relationships.  An  exact  definition  of  the 
term  in  a  few  words  is  therefore  difficult,  if  not  impossible. 
Mr.  Justice  Field  briefly  summarized  the  nature  of  the 
interest  in  the  following  words : 1 

It  is  not  easy  to  define  with  precision  what  will  in  all  cases 
constitute  an  insurable  interest  so  as  to  take  the  contract  out 
of  the  class  of  wager  policies.  It  may  be  stated  generally, 
however,  to  be  such  an  interest,  arising  from  the  relations  of 
the  party  obtaining  the  insurance,  either  as  creditor  of  or 
surety  for  the  assured,  or  from  the  ties  of  blood  or  marriage 
to  him,  as  will  justify  a  reasonable  expectation  of  advantage  or 
benefit  from  the  continuance  of  his  life.  It  is  not  necessary 
that  the  expectation  of  advantage  or  benefit  should  be  always 
capable  of  pecuniary  estimation,  for  a  parent  has  an  insurable 
interest  in  the  life  of  his  child,  and  a  child  in  the  life  of  his 
parent,  a  husband  in  the  life  of  his  wife,  and  a  wife  in  the 
life  of  her  husband.  The  natural  affection  in  cases  of  this 
kind  is  considered  more  powerful  —  as  operating  more  effica- 
ciously—  to  protect  the  life  of  the  insured  than  any  other  con- 
sideration. But  in  all  cases  there  must  be  a  reasonable  ground, 
founded  upon  the  relations  of  the  parties  to  each  other,  either 
pecuniary  or  of  blood  or  affinity,  to  expect  some  benefit  or  ad- 
vantage from  the  continuance  of  the  life  of  the  assured. 
Otherwise,  the  contract  is  a  mere  wager,  by  which  the  party 
taking  the  policy  is  directly  interested  in  the  early  death  of  the 

i  Warnock  v.  Davis,  104  U.  S.  775. 

384 


INSUKABLE  INTEREST  385 

assured.  Such  policies  have  a  tendency  to  create  a  desire  for 
the  event.  They  are,  therefore,  independently  of  any  statute 
on  the  subject,  condemned,  as  being  against  public  policy. 

Insurable  Interest  of  the  Insured  in  His  Own  Life. —  It 

is  a  well  accepted  principle  of  law  that  every  man  possesses 
an  insurable  interest  to  an  unlimited  extent  in  his  own  life, 
and  that  he  may  make  his  insurance  payable  to  any  person 
he  chooses  to  name  as  beneficiary.  In  this  respect  life  in- 
surance affords  a  striking  contrast  to  fire  and  other  forms  of 
property  insurance.  Fire-insurance  policies,  for  example,  are 
contracts  of  indemnity  and  the  company's  liability  is  limited 
to  the  value  of  the  property  at  the  time  of  the  fire,  i.e.  the 
-face  of  the  policy,  owing  to  depreciation  of  the  property  or 
other  causes,  is  not  necessarily  the  sum  that  will  be  paid  when 
a  total  loss  of  the  property  occurs.  Life-insurance  contracts, 
however,  are  not  regarded  purely  as  contracts  of  indemnity, 
and  in  cases  where  the  insurance  is  taken  out  by  the  person 
whose  life  is  insured,  the  courts  have  refused  to  establish  any 
degree  of  relationship  between  the  amount  of  insurance  and 
the  value  of  the  life  on  which  it  is  taken.  The  position  of 
the  courts  in  this  matter  is  summarized  by  Eichards 2  as 
follows : 

Every  man's  life  is  presumed  to  be  valuable  to  himself,  there- 
fore, whenever  the  insured  takes  out  a  policy  on  his  own  life, 
whether  payable  to  himself,  his  estate  or  other  beneficiaries  of 
his  own  selection,  until  it  is  affirmatively  shown  that  he  en- 
tered into  the  contract  with  the  purpose  of  hastening  his  death, 
or  evading  the  law,  the  usual  love  of  life  is  held  by  the  better 
authority  to  satisfy  the  legal  demand  for  evidence  of  a  suf- 
ficient insurable  interest.  Accordingly,  every  man  is  said  to 
have  an  insurable  interest  in  his  own  life  and  to  any  amount. 
But  when  the  insurance  is  taken  out  by  a  person  other  than 
the  life  insured,  the  problems  presented  are  not  always  so  easy 
of  solution  and  the  rules  relating  to  insurable  interest  become 
more  or  less  arbitrary. 

It  has  been  held,  however,  that,  if  the  beneficiary  has  an 
insurable  interest,  the  party  taking  out  the  insurance  need 

2  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance,  40-41. 


386        THE  PKINCIPLES  OF  LIFE  INSUKANCE 

have  none.  And  similarly  it  has  been  held  that  if  only  one 
of  the  beneficiaries  has  an  insurable  interest  the  policy  will 
not  be  avoided.  The  doctrine  of  the  necessity  of  an  insurable 
interest  has  not  been  adopted  for  the  benefit  of  the  insurance 
company,  but  out  of  regard  to  the  public  welfare. 

Creditor's  Insurable  Interest  in  the  Life  of  the  Debtor. 

• —  Turning  now  to  a  consideration  of  the  subject  from  the 
standpoint  of  insurance  taken  out  by  persons  on  the  lives  of 
other  persons,  we  unfortunately  meet  with  a  great  variety  of 
court  decisions.  This  lack  of  harmony  in  the  court  law  pre- 
sents itself  in  nearly  all  relationships  which  may  arise  out 
of  commercial  dealings  or  out  of  the  ties  of  affection  or  kin- 
ship. 

With  respect  to  creditor  and  debtor  ie  the  rule  is  well 
settled  that  a  creditor  has  an  insurable  interest  in  the  life 
of  his  debtor  which  is  said  to  survive  a  discharge  in  bank- 
ruptcy or  general  assignment  for  creditors.  And  the  rule 
applies  whether  the  creditor  is  assignee  or  insures  his  debt- 
or's life;  and  although  the  debt  is  voidable,  or  not  enforce- 
able on  account  of  the  statute  of  limitations/' !  In  this 
respect,  however,  the  important  question  is  the  amount  of  in- 
surance, as  compared  with  the  amount  of  the  debt,  which  the 
creditor  shall  be  allowed  to  take  on  the  life  of  the  debtor. 
Manifestly,  the  creditor's  insurable  interest  should  not  be 
limited  to  the  face  of 'the  indebtedness,  because  under  such 
circumstances  the  creditor,  upon  the  death  of  the  debtor, 
would  be  enabled  to  indemnify  himself  only  to  the  extent 
of  the  debt,  and  would  be  unsecured  as  regards  the  premiums 
paid  together  with  interest  thereon.  Many  courts  have  there- 
fore held  that  creditors  should  be  permitted  to  provide  them- 
selves with  insurance  on  the  debtor's  life  to  an  amount 
equal  to  the  debt  and  interest  thereon,  plus  all  premiums 
(with  interest  thereon)  required  to  keep  the  policy  alive.  The 
Pennsylvania  Court,  for  example  (Wheel and  v.  Atwood,  192 
Pa.  St.  237),  laid  down  the  rule  that  the  debtor's  life  may 
be  insured  by  the  creditor  for  an  amount  equal  to  the  debt 

s  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance,  45. 


INSURABLE  INTEREST  387 

plus  all  premiums  payable  during  the  life  expectancy  of  the 
insured  according  to  the  Carlisle  table,  together  with  interest 
on  the  debt  and  premiums.  Such  attempts  to  define  precisely 
the  creditor's  insurable  interest,  however,  have  not  met  with 
ithe  favorable  opinion  of  legal  critics;  but,  instead,  have  been 
opposed  on  the  grounds  that  "the  validity  of  the  contract 
should  be  determined  according  to  the  motives  of  the  parties 
and  the  prospect  a,s  viewed  at  its  date  rather  than  after  the 
death  of  the  insured;  and  second,  the  total  amount  of  pre- 
miums as  thus  viewed  with  interest  thereon  will  always  exceed 
the  whole  face  of  the  policy  leaving  to  the  creditor  nothing  at 
all  to  apply  upon  the  debt."  4 

As  contrasted  with  the  aforementioned  attempts  to  fix  a 
definite  test  for  the  creditor's  insurable  interest,  two  other 
lines  of  decisions  should  be  mentioned.  One  of  these,  adopted 
by  the  United  States  Supreme  Court,  places  an  indefinite  re- 
striction upon  the  insurable  interest  of  the  creditor  by  pro- 
viding that  the  relationship  between  the  amount  of  insurance 
and  the  amount  of  the  debt  must  not  be  so  disproportionate 
as  to  make  the  policy  take  on  the  appearance  of  a  wagering 
contract  as  distinguished  from  its  legitimate  purpose,  viz,  se- 
jcurity  for  the  indebtedness.  In  Cammack  v.  Lewis  (15  Wall 
643)  the  court,  for  example,  declared  a  policy  of  $3,000  taken 
out  by  a  creditor  to  secure  a  debt  of  $70  to  be  "  a  sheer  wager- 
ing policy,  without  any  claim  to  be  considered  as  one  meant 
;to  secure  the  debt."  Mr.  Justice  Miller  stated  in  his  opinion 
that  "  to  procure  a  policy  for  $33000  to  cover  a  debt  of  $70  is 
of  itself  a  mere  wager.  The  disproportion  between  the  real 
interest  of  the  creditor  and  the  amount  to  be  received  by  him 
deprives  it  of  all  pretense  to  be  a  bona  fide  effort  to  secure 
the  debt,  and  the  strength  of  this  proposition  is  not  diminished 
.by  the  fact  that  Cammack  was  to  get  only  $2,000  out  of 
$3,000;  nor  is  it  weakened  by  the  fact  that  the  policy  was 
taken  out  in  the  name  of  Lewis  and  assigned  by  him  to  Cam- 
mack."  But  while  making  the  relationship  between  the 

*  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance,  46. 


388       THE  PRINCIPLES  OF  LIFE  INSURANCE 

amount  of  insurance  and  the  amount  of  the  debt  an  impor- 
tant factor,  to  be  considered  off  the  merits  of  each  case,  the 
Supreme  Court  has  never  undertaken  to  define  this  relation- 
ship precisely. 

Opposed  to  the  foregoing  rule  are  those  decisions  which, 
while  limiting  the  creditor  in  his  interest  in  the  recovery  on 
a  policy,  permit  him  to  secure  as  much  insurance  on  the 
debtor's  life  as  he  may  choose  to  take  out.  His  right  to  re- 
cover, however,  is  limited  to  the  amount  of  the  debt  and  the 
premiums  plus  interest  thereon,  the  balance,  if  any,  passing 
to  the  debtor.  This  rule,  sometimes  referred  to  as  the  Texas 
rule,  is  well  exemplified  by  Cheeves  v.  Anders  (87  Tex.  287). 
Here  the  court  declared  that  "  the  limit  of  interest  of  a  creditor 
in  a  policy  upon  the  life  of  his  debtor  is  the  amount  of  such 
debt  and  interest  plus  the  amount  expended  to  preserve  the 
policy  with  interest  thereon."  The  remainder  of  the  proceeds 
of  the  policy,  the  court  held,  should  go  to  the  estate  of  the 
insured  on  the  ground  that  "  if  the  person  named  as  benefici- 
ary, or  the  assignee  of  such  policy,  has  no  insurable  interest 
in  the  life  of  the  insured,  he  will  hold  the  proceeds  as  the 
trustee  for  the  benefit  of  those  entitled  by  law  to  receive  it." 

Insurable  Interest  Growing  Out  of  Other  Business  Re- 
lations.—  Numerous  business  relations,  other  than  that  of 
creditor  and  debtor,  justify  the  taking  of  insurance  by  one 
person  on  the  life  of  another.  Thus,  a  surety  on  a  bond, 
though  no  default  on  the  bond  has  occurred,  has  an  insurable 
interest  in  the  life  *of  the  principal.  Similarly,  the  holder 
of  a  property  interest  contingent  upon  another  person  reach- 
ing a  certain  age  may  protect  himself  against  the  loss  of  his 
contingent  right  through  the  death  of  that  person  before 
attaining  the  prescribed  age.  The  courts  have  even  refused 
to  hold  that  those  furnishing  funds  for  corporate  enterprises 
have  no  insurable  interest  in  the  lives  of  the  managers  and 
promoters  of  said  corporations;  and  it  is  stated  that  certain 
stockholders  in  the  United  States  have  taken  out  insurance 
on  the  lives  of  prominent  financiers  who  were  instrumental  in 
financing  and  promoting  the  corporations  whose  stock  they 


INSURABLE  INTEREST  389 

held.  Among  other  important  instances  of  lawful  insurable 
interest  may  be  mentioned  the  following :  a  tenant  in  the  life 
of  a  landlord  who  possesses  only  a  life  interest  in  the  premises, 
a  partner  in  the  life  of  a  copartner,  one  party  to  a  joint  ven- 
ture in  the  life  of  another  party,  and  an  employer  in  the  life 
of  an  employee.5 

Insurable  Interest  of  the  Assignee. —  The  assignment  of 
a  policy  and  the  appointment  of  a  beneficiary,  it  should  be 
noted,  have  been  held  by  the  courts  to  be  subject  to  contract  or 
statutory  restrictions.  The  important  question  for  considera- 
tion under  this  heading,  however,  is :  Can  a  policy  taken  out 
by  a  person  on  his  own  life,  and  valid  at  its  inception,  be  sub- 
sequently assigned  to  one  who  has  no  insurable  interest  in  the 
life  of  the  insured?  In  answering  this  question  the  courts 
are  by  no  means  a  unit.  An  examination  of  the  federal  de- 
cisions shows  the  position  of  the  United  States  Supreme  Court 
to  be  somewhat  in  doubt.  On  the  one  hand,  some  of  the  de- 
cisions would  indicate  the  courts'  disapproval  of  such  a  prac- 
tice,6 and  the  same  ruling  prevails  in  Alabama,  Kansas,  Ken- 
tucky, North  Carolina,  Pennsylvania,  Texas  and  Tennessee. 
In  other  instances  the  court  held  that  "  there  is  no  doubt  that 
a  man  may  effect  an  insurance  on  his  own  life  for  the  benefit 
of  a  relative  or  friend,  or  two  or  more  persons  on  their  joint 
lives,  for  the  benefit  of  the  survivor  or  survivors"  (94  U.  S. 
457).  And  again:  "A  policy  of  life  insurance,  without  re- 

5  See   Richards,   page   48,   for   numerous   court   citations   showing 
the  many  property  or  commercial  relationships  which  may  and  which 
may  not  be  made  the  subject  of  an  insurable  interest. 

6  In  Wamock  v.  Davis,  104  U.  S.  775,  the  court  states :     "  If  there 
be  any  sound  reason  for  holding  a  policy  invalid  when  taken  out 
by  a  party  who  has  no  interest  in  the  life  of  the  assured  it  is  diffi- 
cult to  see  why  that  reason  is  not  as  cogent  and  operative  against 
a  party  taking  an  assignment  of  a  policy  upon  the  life  of  a  per- 
son in  which  he  has  no  interest.     The  same  ground  which  invali- 
dates the  one  should  invalidate  the  other,  so  far,  at  least,  as  to 
restrict  the  right  of  the  assignee  to  the  sums  actually  advanced  by 
him.     In  the  conflict  of  decisions   on  this  subject  we  are  free  to 
follow   those   which    seem   more   fully   in   accord   with   the   general 
policy  of  the  law  against  speculative  contracts  upon  human  life." 


390        THE  PKINCIPLES  OF  LIFE  INSURANCE 

strictive  words,  is  assignable  by  the  assured  for  a  valuable  con- 
sideration equally  with  any  other  chose  in  action  when  the 
assignment  is  not  made  to  cover  a  mere  speculative  risk  and 
thus  evade  the  law  against  wager  policies"  (117  IT.  S.  591). 
Eichards  in  his  analysis  of  the  various  decisions  finds  the 
doctrine  of  the  highest  court  to  be  this :  "  AVhere  a  man  effects 
insurance  upon  his  own  life  for  the  benefit  of  another  and  pays 
the  premiums,  an  insurable  interest  will  readily  be  inferred 
from  almost  any  kinship  or  intimate  relationship,  and  where 
even  a  stranger  buys  the  policy  in  good  faith,  his  payment 
of  a  consideration  will  be  regarded  as  creating  an  insurable 
interest,  at  all  events  to  that  extent."  7  It  may  be  added  that 
many  of  the  cases  declaring  an  assignment  without  interest  to 
be  illegal  involve  a  consideration  of  facts  which  indicate 
strongly  that  the  transaction  under  consideration  constituted 
an  attempt  to  secure  speculative  insurance. 

The  weight  of  authority  seems  to  support  the  doctrine  that 
a  policy  valid  at  its  inception  is  a  mere  chose  in  action  which 
may,  for  value  or  by  way  of  gift,  be  assigned  subsequently 
by  the  insured  to  anyone,  irrespective  of  insurable  interest  of 
the  assignee  provided  that  the  transaction  is  bona  fide  and  not 
a  device  to  conceal  wagering,  speculation  in  insurance,  or  at- 
tempts at  evasion  of  the  law.  This  doctrine,  prevailing  in 
most  of  the  states,8  has  been  extended  in  some  instances  to 
permit  a  beneficiary  or  creditor  holding  a  policy  to  assign 
the  same  to  one  possessing  no  insurable  interest,  provided  such 
assignment  has  not  for  its  purpose  the  concealment  of  wager- 
ing or  speculative  insurance.  Generally  speaking,  assignments 
of  policies  are  not  regarded  by  the  courts  as  creating  new  con- 
tracts, but  merely  as  continuing  the  old  ones.  The  modern 
tendency  in  business  seems  to  be  in  favor  of  making  the 
transfer  of  life-insurance  policies  as  free  as  possible,  and  if 

7  Richards,  p.  54. 

8  Among  the  states  in  which  this  view  has  been  upheld  may  be 
mentioned   California,    Colorado,    Connecticut,   Georgia,   Illinois,   In- 
diana,   Maryland,    Massachusetts,    Mississippi,    New    York,    Ohio, 
Rhode   Island,   Vermont,   Wisconsin,   and   South   Carolina.     This   ia 
also  the  ruling  in  England  and  Canada. 


INSUKABLE  INTEREST  391 

the  transfer  is  effected  with  the  consent  of  the  parties,  the 
courts  are  more  and  more  inclined  to  regard  objections  on 
the  ground  of  public  policy  as  of  little  consequence. 

Insurable  Interest  Arising  Out  of  Ties  of  Affection, 
Blood  or  Marriage. —  The  courts  have  generally  held  that 
certain  ties  of  near  relationship  create  an  insurable  interest, 
even  though  the  element  of  dependence  is  not  present.  Thus, 
according  to  the  weight  of  authority,  a  parent  has  an  in- 
surable interest  in  the  life  of  a  child  even  though  the  same 
be  permanently  disabled.  The  relationship  of  husband  and 
wife  is  also  conclusively  presumed  in  nearly  all  cases  to 
establish  an  insurable  interest  on  behalf  of  either  party  in 
the  other's  life. 

As  regards  other  relationships,  however,  the  courts  have 
generally  taken  the  position  that  the  interest  must  be  based 
upon  a  reasonable  expectation  of  deriving  pecuniary  benefit 
from  the  continuance  of  the  insured's  life.  On  this  theory 
American  courts  have  repeatedly  held,  for  example,  that  a 
woman  has  an  insurable  interest  in  the  life  of  her  fiance, 
since  that  relationship  gives  to  her  a  reasonable  right  to  ex- 
pect pecuniary  benefit.  An  excellent  review  of  the  numerous 
decisions  referring  to  insurable  interest  arising  out  of  ties 
of  blood  or  affection  is  furnished  by  the  Circuit  Court  of 
Appeals.9  Following  a  review  of  the  decisions  bearing  on 
the  subject  the  court  held: 

The  sum  of  the  decisions  and  of  text-book  discussions  upon 
the  subject  of  insurable  interest  may,  we  think,  be  fairly  stated 
thus:  No  person  has  an  insurable  interest  in  the  life  of  an- 
other unless  he  would  in  reasonable  probability  suffer  a  pe- 
cuniary loss,  or  fail  to  make  a  pecuniary  gain,  by  the  other's 
death;  or  (in  some  jurisdictions)  unless,  in  the  discharge  of 
some  undertaking,  he  has  spent  money,  or  is  about  to  spend 
money,  for  the  other's  support  or  advantage.  The  extent  of 
the  insurable  interest  —  the  amount  for  which  a  policy  may  be 
taken  out,  or  for  which  recovery  may  be  had  —  is  not  now 
under  consideration.  What  is  often  called  "  relationship  in- 

»  Life  Insurance  Clearing  Company  v.  O'Neill,   106  Fed.  800. 


392       THE  PEINCIPLES  OF  LIFE  INSUBANCE 

surance"  must  be  governed  by  this  rule.  It  must  rest  upon 
the  foundation  of  a  pecuniary  interest,  although  the  interest 
may  be  contingent,  and  need  not  be  capable  of  exact  estimation 
in  dollars  and  cents.  Sentiment  or  affection  is  not  sufficient 
of  itself,  although  it  may  often  be  influential  in  persuading  a 
court  or  jury  to  reach  the  conclusion  that  a  beneficiary  had  a 
reasonable  expectation  of  pecuniary  advantage  from  the  con- 
tinued life  of  the  insured.  In  one  relation  only  —  the  relation 
of  husband  and  wife  —  is  the  actual  existence  of  such  a  pe- 
cuniary interest  unimportant;  the  reason  being  that  a  real 
pecuniary  interest  is  found  in  so  great  a  majority  of  cases  that 
the  courts  conclusively  presume  it  to  exist  in  every  case,  what- 
ever the  fact  may  be,  and  therefore  will  not  inquire  into  the 
true  state  of  a  few  exceptional  instances.  This,  we  think,  is 
essentially  what  is  meant  by  the  declaration  of  courts  and  text- 
book writers  that  the  mere  relationship  of  husband  and  wife 
is  sufficient  to  give  an  insurable  interest.  .  .  . 

In  all  other  relationships  there  is  no  presumption  of  interest, 
and  no  insurable  interest  exists  unless  the  reasonable  likelihood 
of  pecuniary  loss  or  gain  is  present  in  actual  fact.  No  doubt, 
judicial  language  is  to  be  found  supporting  the  view  that  the 
mere  relationship  of  parent  and  child  is  sufficient  to  give  an 
insurable  interest. 

The  Time  and  Continuity  of  Insurable  Interest. —  Eecent 
cases  affecting  insurance  on  property  exhibit  a  strong  tend- 
ency to  apply  the  rule  that  an  insurable  interest  existing  at 
some  time  during  the  risk  and  at  the  time  of  the  loss  is  suf- 
ficient to  validate  the  policy,  and  that  it  is  unnecessary  to  have 
the  interest  exist  at  the  time  of  the  issuance  of  the  contract. 
As  regards  life  insurance  the  weight  of  authority  is  to  the 
opposite  effect,  i.e.  the  interest  must  exist  at  the  time .  the 
contract  is  made,  and  a  policy,  valid  at  its  inception,  will 
not  thereafter  be  voided  if  it  should  happen  that  the  interest 
ceases  before  the  maturity  of  the  contract,  unless  the  pro- 
visions of  the  policy  are  such  as  to  bring  about  that  result. 
Indeed,  the  courts  have  decided  that  a  policy  naming  a  mar- 
ried woman  as  beneficiary  remains  in  force  even  though  she 
obtains  a  divorce  before  the  insured^  death.  The  principal 
cases  which  are  exceptions  to  the  aforementioned  general  rule 


INSURABLE  INTEREST  393 

refer  chiefly  to  the  insurable  interest  of  creditors  and  as- 
signees. Here  a  certain  group  of  cases  hold  that  the  assignee 
of  a  life-insurance  policy,  even  though  valid  when  issued,  must 
nevertheless  possess  an  insurable  interest.  The  United  States 
Supreme  Court  has  also  decided  (144  U.  S.  621)  that  "if  the 
policy  of  insurance  be  taken  out  by  a  debtor  on  his  own  life 
naming  a  creditor  as  beneficiary,  or  with  a  subsequent  as- 
signment to  the  creditor,  the  general  doctrine  is  that  on  pay- 
ment of  the  debt  the  creditor  loses  all  interest  therein  and  the 
policy  becomes  one  for  the  benefit  of  the  insured  and  col- 
lectible by  his  executors  or  administrators." 


CHAPTER  XXX 
THE  LAW  PERTAINING  TO  THE  BENEFICIARY 

If  a  policy  of  life  insurance  is  taken  out  by  one  person  on 
the  life  of  another  in  whom  he  has  an  insurable  interest,  such 
policy,  as  previously  explained,  may  be  regarded  by  him  as 
his  own  property,  free  from  any  control  whatsoever  by  the 
person  whose  life  is  insured.  But  this  chapter  is  concerned 
primarily  with  a  policy  which  the  insured  has  taken  out 
on  his  own  life  for  the  benefit  of  someone  whom  he  has 
named  as  beneficiary  therein.  Very  frequently,  the  insured 
sees  fit  to  name  gratuitously  some  beneficiary  or  beneficiaries, 
such  as  his  wife,  children  or  near  relatives,  and  sometimes 
without  their  having  knowledge  of  his  act.  This  common 
practice  of  thus  gratuitously  designating  a  beneficiary  raises 
many  important  legal  questions.  Under  what  conditions  does 
the  beneficiary's  interest  become  a  vested  right  which  cannot 
be  impaired  by  either  the  insured  or  his  creditors?  Under 
what  conditions  may  the  insured  retain  sufficient  control 
over  his  policy  to  change  the  beneficiary  at  will?  To  what 
extent  is  a  beneficiary's  interest  in  a  policy  transmissible  to 
his  or  her  representatives?  What  is  the  effect  of  a  cessation 
of  the  beneficiary's  insurable  interest  in  the  life  of  the  insured 
prior  to  the  maturity  of  the  contract?  To  what  extent  are 
the  rights  of  a  beneficiary  in  a  bankrupt's  policy  subject  to 
the  claims  of  creditors?  These  are  some  of  the  important 
questions  which,  as  regards  essentials,  it  is  the  purpose  of  this 
chapter  to  answer. 

Vested  Rights  of  the  Beneficiary. —  Unless  the  policy  re- 
serves to  the  insured  the  power  to  change  the  beneficiary  at 
will,  such  beneficiary  is  held  to  have  acquired  a  vested  right  in 
the  policy  immediately  upon  its  issuance,  although  he  or  she 

394 


LAW  PERTAINING  TO  THE  BENEFICIARY     395 

may  not  even  have  knowledge  of  its  existence.  This  vested 
right  is  so  complete  that  neither  the  insured  nor  his  creditors 
can  impair  the  same  without  the  beneficiary's  consent.  This 
general  principle  of  law  is  well  stated  by  the  Supreme  Court 
of  the  United  States  in  the  following  words : * 

We  think  it  cannot  be  doubted  that  in  the  instance  of  con- 
tracts of  insurance  with  a  wife  or  children,  or  both,  upon  their 
insurable  interest  in  the  life  of  the  husband  or  father,  the  latter, 
while  they  are  living,  can  exercise  no  power  of  disposition  over 
the  same  without  their  consent ;  nor  has  he  any  interest  therein 
of  which  he  can  avail  himself,  nor  upon  his  death  have  his 
personal  representatives  or  his  creditors  any  interest  in  the 
proceeds  of  such  contracts,  which  belong  to  the  beneficiaries 
to  whom  they  are  payable.  It  is  indeed  the  general  rule  that  a 
policy,  and  the  money  to  become  due  under  it,  belong,  the  mo- 
ment it  is  issued,  to  the  person  or  persons  named  in  it  as  bene- 
ficiary or  beneficiaries,  and  that  there  is  no  power  in  the  person 
procuring  the  insurance  by  any  act  of  his,  by  deed  or  by  will, 
to  transfer  to  any  other  person  the  interest  of  the  person  named. 

It  may  be  added,  of  course.,  that  the  beneficiary's  vested 
right  is  a  contingent  one  in  so  far  that  the  payment  of  the 
proceeds  depends  upon  the  maturity  of  the  contract  and  the 
observance  by  the  insured  of  all  warranties  and  policy  pro- 
visions. 

The  wisdom  of  the  foregoing  rule  cannot  be  questioned. 
Many  court  decisions  take  the  view  that  when  a  beneficiary 
has  been  gratuitously  designated  by  the  insured  the  policy 
partakes  of  the  nature  of  a  voluntary  trust  or  gift  to  the  payee, 
and  that  the  probable  intent  of  the  donor  should  be  enforced 

i  Central  Bank  v.  Hume,  128  U.  S.  195.  The  principle  of  law- 
defined  in  this  case  has  been  disapproved  by  the  courts  of  England 
and  Wisconsin.  The  Wisconsin  court,  in  a  notable  exception 
(estate  of  Breitung,  78  Wis.  33),  held  that  "one  who  has  procured 
a  policy  of  insurance  upon  his  own  life  for  the  benefit  of  another, 
and  has  paid  the  premiums  thereon  as  they  become  due,  may  dis- 
pose of  the  insurance  money  by  will  to  the  exclusion  of  the  bene- 
ficiary named  in  the  policy,  during  the  lifetime  of  such  bene- 
ficiary." 


396       THE  PRINCIPLES  OF  LIFE  INSURANCE 

so  long  as  the  beneficiary  is  not  guilty  of  intentionally  caus- 
ing the  death  of  the  insured.  But  even  more  fundamental  is 
the  plain  duty  of  every  person,  if  financially  able  to  do  so,  to 
use  life  insurance  as  a  means  to  protect  wife  and  children 
and  other  dependents  of  the  household  against  the  want  and 
discomfort  that  may  result  from  premature  death.  In  mak- 
ing such  provision  for  his  dependents,  it  is  certainly  probable 
that  the  insured  intended  to  safeguard  the  interest  of  those 
named  in  his  policy  as  beneficiaries  against  the  claims  of  his 
possible  future  creditors.  In  fact,  the  United  States  Supreme 
Court,  in  the  decision  already  referred  to,  also  held  that :  "  A 
married  man  may  rightfully  devote  a  moderate  portion  of  his 
earnings  to  insure  his  life,  and  thus  make  reasonable  provision 
for  his  family  after  his  decease,  without  being  thereby  held 
to  intend  to  delay,  or  defraud,  his  creditors,  provided  no  such 
fraudulent  intent  is  shown  to  exist  or  must  be  necessarily  in- 
ferred from  the  surrounding  circumstances."  There  is  also 
much  to  support  the  view  that  the  courts  in  adopting  the  rule 
above  stated  have  been  influenced  by  the  numerous  statutes 
which  have  been  adopted  for  the  protection  of  the  interest 
of  a  married  woman  and  her  children  in  the  proceeds  of  her 
husband's  life  insurance  against  the  claims  of  his  creditors. 
At  a  recent  date  thirty-five  states  had  enacted  laws  to  this 
effect ; 2  while  thirty-one  states  had  laws  protecting  the  pro- 
ceeds of  a  policy  taken  out  by  a  married  woman  on  the  life  of 
her  husband  in  favor  of  herself  and  children  against  the  claims 
of  her  husband's  creditors  or  representatives.3 

2  The  New  York  statute,  which  is  used  as  a  specimen,  provides 
that :  "  The  money  or  other  benefit,  charity,  relief  or  aid  paid 
or  to  be  paid,  provided  or  rendered  by  any  such  corporation,  asso- 
ciation or  society  shall  not  be  liable  to  be  seized,  taken  or  appro- 
priated by  any  legal  or  equitable  process,  to  pay  any  debt  or  lia- 
bility of  a  member  or  any  debt  or  liability  of  the  widow  of  a 
deceased  member  of  such  corporation  designated  as  the  beneficiary 
thereof,  which  was  incurred  before  such  money  was  paid  to  her  or 
such  benefit,  charity,  relief  or  aid  was  provided  or  rendered." 

s  In  this  respect  the  law  of  New  York  is  here  quoted  as  a  speci-  I 
men.  It  provides  that:  "A  married  woman  may,  in  her  own  j 
name,  or  in  the  name  of  a  third  person,  with  his  consent,  as  her  i 


LAW  PERTAINING  TO  THE  BENEFICIARY     397 

Reserving  the  Right  to  Change  the  Beneficiary  at  Will 
—  Claims  of  Creditors  Where  the  Beneficiary  Has  Been 
Thus  Named. —  Life-insurance  policies  may  contain  a  pro- 
vision reserving  to  the  insured  full  power  to  change  the  bene- 
ficiary or  beneficiaries  at  will  while  the  policy  is  in  force  and 
subject  to  any  previous  assignment.  When  this  right  is  re- 
served the  policy  remains  the  property  of  the  insured,  and 
the  original  beneficiary  obtains  no  vested  rights  in  the  policy 
or  its  proceeds  but  possesses  only  a  "  mere  expectancy  "  until 
after  the  maturity  of  the  contract. 

Various  methods  may  be  used  in  designating  the  insured's 
right  of  revocation.  Some  companies  provide  in  their  policies 
words  to  the  effect  that  "when  the  right  of  revocation  has 
been  reserved,  or  in  case  of  the  death  of  any  beneficiary  under 
either  a  revocable  or  irrevocable  designation,  the  insured,  if 
there  be  no  existing  assignment  of  the  policy  made  as  herein 
provided,  may,  while  the  policy  is  in  force,  designate  a  new 

trustee,  cause  the  life  of  her  husband  to  be  insured  for  a  definite 
period,  or  for  the  term  of  his  natural  life.  Where  a  married 
woman  survives  such  period  or  term  she  is  entitled  to  receive  the 
insurance  money,  payable  by  the  terms  of  the  policy,  as  her  sepa- 
rate property,  and  free  from  any  claim  of  a  creditor  or  representa- 
tive of  her  husband,  except  that  where  the  premium  actually 
paid  annually  out  of  her  husband's  property  exceeds  five  hundred 
dollars,  that  portion  of  the  insurance  money  which  is  purchased  by 
excess  of  premium  above  five  hundred  dollars,  is  primarily  liable 
for  the  husband's  debts.  The  policy  may  provide  that  the  insur- 
ance, if  the  married  woman  dies  before  it  becomes  due  and  with- 
out disposing  of  it,  shall  be  paid  to  her  husband  or  to  his,  her  or 
their  children,  or  to  be  for  the  use  of  one  or  more  of  those  per- 
sons; and  it  may  designate  one  or  more  trustees  for  a  child  or 
children  to  receive  and  manage  such  money  until  such  child  or 
children  attain  full  age.  '  The  married  woman  may  dispose  of  such 
policy  by  will  or  written  acknowledged  assignment  to  take  effect 
on  her  death,  if  she  dies  thereafter  leaving  no  descendant  surviving. 
After  the  will  or  the  assignment  takes  effect,  the  legatee  or  assig- 
nee takes  such  policy  absolutely. 

"  A  policy  of  insurance  on  the  life  of  any  person  for  the  benefit 
of  a  married  woman,  is  also  assignable  and  may  be  surrendered  to 
the  company  issuing  the  same,  by  her,  or  her  legal  representative, 
with  the  written  consent  of  the  assured." 


398        THE  PRINCIPLES  OF  LIFE  INSURANCE 

beneficiary,  with  or  without  reserving  the  right  of  revocation, 
by  riling  written  notice  thereof  at  the  home  office  of  the  com- 
pany accompanied  by  the  policy  for  suitable  indorsement 
thereon.  Such  change  shall  take  effect  when  indorsed  on  the 
policy  by  the  company  and  not  before."  Other  policies  state 
that  the  insured  may  at  any  time  change  the  beneficiary  or 
beneficiaries  under  the  policy,  and  where  this  is  done  it  is 
frequently  stipulated  that  the  insured  may,  however,  declare 
the  designation  of  any  beneficiary  to  be  irrevocable.  In  other 
instances  the  change  of  beneficiary  clause  may  contain  stipu- 
lations to  the  effect  that  if  any  beneficiary  shall  die  before 
the  insured,  the  interest  of  such  beneficiary  shall  vest  in  the 
insured,  or  that  the  insured  reserves  the  right,  without  the 
beneficiary's  consent,  to  surrender  the  policy  for  its  cash  value 
or  to  borrow  thereon. 

In  contrast  to  the  foregoing  provisions,  some  companies  pur- 
posely omit  a  change  of  beneficiary  clause  in  their  contracts, 
and  ask  the  insured  to  state  specifically  in  his  application 
his  position  in  regard  to  this  privilege.  These  companies, 
while  admitting  that  the  right  of  revocation  may  in  occasional 
instances  prove  of  great  practical  use,  call  attention  to  the 
fact  that  "  a  policy  containing  the  unconditional  reservation 
of  the  right  to  change  the  beneficiary  produces  an  instrument 
identical  with  the  one  in  which  the  estate  is  made  the  bene- 
ficiary." They,  therefore,  hold  that  the  danger  connected 
with  such  an  unconditional  reservation,  regarded  by  them  as  a 
questionable  privilege,  should  always  be  called  to  the  atten- 
tion of  the  applicant  by  the  agent.  Then,  if  the  applicant  still 
insists  on  having  the  privilege,  the  company  will  gladly  grant 
the  same;  but  under  these  circumstances  it  is  felt  that  the 
insured  asked  for  the  privilege  with  a  full  understanding  of 
what  he  was  doing  and  what  his  request  might  mean  to  himself 
and  family  in  the  future.  On  the  other  hand,  the  advocates 
of  a  special  beneficiary  clause  for  every  contract  consider  the 
practice  to  be  supported  by  reasons  of  expediency  and  equity, 
and  contend  that  the  insured  should,  as  a  matter  of  right,  have 
the  privilege  of  doing  as  he  wishes  with  his  own. 


LAW  PERTAINING  TO  THE  BENEFICIAKY      399 

Whatever  the  practice  in  designating  the  insured's  right  of 
revocation,  it  is  highly  important  that  the  legal  significance 
of  the  privilege  to  change  the  beneficiary  at  will  should  be 
clearly  comprehended  by  the  policyholder.  The  possibilities 
of  future  bankruptcy  do  not  seriously  occupy  the  thoughts  of 
;the  average  person,  yet  statistics  reveal  a  surprisingly  large 
number  of  business  failures.  Records  show  that  during  the 
past  thirty  years  the  number  of  actual  business  failures, 
•  as  compiled  by  Bradstreet,  averages  annually  1  per  cent, 
of  the  total  number  of  businesses  listed  by  this  organization. 
As  has  been  well  stated :  "  The  probability  of  business  mor- 
tality is  as  great  as  that  of  adult  human  mortality  at  its 
average  age.  In  fact,  it  is  identical  with  the  1  per  cent, 
shown  by  the  American  tables  of  mortality  on  selected  lives 
at  age  41."  It  is  also  noteworthy  that  in  a  year  like  1907 
about  19  per  cent,  of  the  total  number  of  failures  and  over 
55  per  cent,  of  the  failure  liabilities  were  traceable  to  dis^- 
asters,  failure  of  apparently  solvent  debtors  and  undue  com- 
petition, i.e.  causes  which  cannot  be  regarded  as  due  to  faults 
of  those  who  failed.  On  the  other  hand,  nearly  65  per  cent, 
•of  the  total  number  of  failures  in  that  year  were  due  either 
to  incompetency  or  to  lack  of  capital. 

;»  The  foregoing  considerations  assume  importance  when  the 
change  of  the  beneficiary  clause  is  viewed  from  the  standpoint 
of  claims  of  creditors.  Judging  from  recent  decisions  it  is 
probable  that  a  clause  reserving  full  power  to  the  insured  to 
change  the  beneficiary  at  will,  or  without  the  consent  of  the 
beneficiary  to  borrow  thereon  or  surrender  the  policy  for  its 
•cash  value,  subjects  the  policy  to  the  claims  of  creditors  and 
causes  it,  in  case  of  the  insured's  bankruptcy,  to  pass  by 
order  of  the  court  to  his  assignee.  Reference  is  frequently 
made  to  the  decision  of  the  United  States  Circuit  Court  of 
Appeals  on  November  9,  1909.3  This  case  dealt  with  a  peti- 
tion to  review  an  order  of  the  District  Court  which  denied 
the  application  of  the  trustee  for  authority  to  surrender  an 

s/w  re  White,  174  Fed.  333. 


400        THE  PRINCIPLES  OF  LIFE  INSURANCE 

ordinary  policy  of  insurance  on  a  bankrupt's  life  and  collect 
the  surrender  value  thereof.  The  policy  provided  for  the  pay- 
ment of  $5,000  to  the  wife,  if  she  survived  her  husband,  int 
ten  annual  installments  of  $500  each,  and  in  case  of  heri 
prior  death  the  policy  was  payable  to  the  husband's  estate  or 
to  any  beneficiary  named  by  him.  The  policy  also  provided 
that  the  insured  could  at  any  time  surrender  the  policy  for 
paid-up  insurance  or  other  value.  In  his  opinion  Judge; 
Ward,  after  reviewing  the  terms  of  the  policy,  concluded  in 
part: 

The  District  Judge  was  of  opinion  that  the  wife  of  the  bank- 
rupt was  the  legal  owner  of  the  policy ;  that  it  was  her  property j 
and,  if  the  insured  had  the  option  of  terminating  her  owner- 
ship, he  had  not  exercised  it.  But  we  think  the  policy  is  the 
property  of  the  husband,  that  the  contract  is  made  with  him,  and 
that  the  wife's  interest  depends  on  the  contingency  of  hei 
surviving  him.  If  the  property  in  the  policy  were  absolutely 
the  wife's,  the  insurance  would  be  payable  upon  her  death  tc 
her  estate.  Certainly  the  bankrupt  has  an  interest  in  the  pol- 
icy. If  he  survives  his  wife,  the  insurance  will  be  payable,  no1 
to  her  estate,  but  to  him,  or  to  his  estate,  or  to  a  beneficiary 
designated  by  him.  This  is  a  vested  future  interest.  Besides 
this,  though  not  obliged  by  the  contract  to  do  so,  the  company 
is  willing,  apparently,  under  the  option  given  the  insured  tc 
surrender  the  policy  for  paid-up  insurance  or  other  value,  tc 
pay  the  sum  of  $1,804.23  upon  its  surrender.  The  situation  is 
exactly  the  same  as  if  the  policy  contained  a  stipulation  foi 
a  cash  surrender  value.  .  .  .  These  are  clearly  interests  of  th( 
bankrupt  which  go  to  the  trustee  under  section  70  a  (5)  oJ 
the  bankruptcy  act,  .  .  .  subject,  of  course,  to  the  privilege 
therein  reserved  to  the  bankrupt  to  keep  the  policy  free  fron 
the  claims  of  his  creditors  participating  in  the  distribution  oJ 
his  estate  by  paying  its  value,  $1,804.23,  to  the  trustees.  .  .  . 

It  was  further  contended  that,  irrespective  of  the  foregoing 
considerations,  the  policy  is  exempt  from  the  operation  of  thj 
National  Bankruptcy  Act  by  virtue  of  the  law  of  New  Yorl^ 
which  was  enacted  for  the  protection  of  the  interest  of  a  mar- 
ried woman  and  her  children  in  the  husband's  policy  against 


LAW  PERTAINING  TO  THE  BENEFICIARY     401 

the  claims  of  his  creditors.     But  with  reference  to  this  con- 
tention the  court  held  that : 

It  is  quite  plain  that  the  policies  referred  to  are  such  as  are 
the  absolute  property  of  a  married  woman  or  her  children,  that 
is,  which  are  payable  to  her,  or  her  children,  or  her  estate. 
They  may  be  taken  out  by  the  husband,  and  the  premiums  up 
to  $500  per  annum  paid  by  him.  Still  the  policy  must  be  one 
which  the  married  woman  may  dispose  of  by  will,  or  may,  with 
the  written  consent  of  her  husband,  assign  or  surrender  to  the 
company.  This  requirement  of  the  husband's  assent  is  not  be- 
cause he  is  the  owner  of  the  policy,  but  is  to  protect  widows 
and  orphans  in  respect  to  such  insurance. 

If,  as  seems  probable,  the  courts  will  generally  interpret  a 
transferable  beneficiary  clause  as  giving  the  trustee  in  bank- 
ruptcy the  power  to  distribute  the  cash  value  of  a  policy  among 
creditors,  it  follows  that  a  policy  taken  out  for  family  pro- 
tection, if  containing  such  a  clause,  will  have  connected  with 
it  a  hazard  that  the  insured,  in  view  of  the  future  possibility 
of  bankruptcy,  should  bear  in  mind  and  carefully  consider. 
Numerous  statutes,  as  we  have  seen,  have  purposely  made  it 
possible  for  men  to  make  suitable  provision  for  their  families 
^in  case  of  premature  death  by  creating  an  insurance  fund 
that  is  immune  from  seizure  by  creditors.  Yet  the  introduc- 
tion of  a  clause  giving  the  insured  a  free  hand  to  change  the 
beneficiary,  or  to  surrender  the  policy  or  use  it  for  borrowing 
purposes,  introduces  an  element  of  uncertainty  in  a  contract 
that  in  most  instances  should  be  made  absolutely  secure  for 
the  benefit  of  those  for  whose  protection  it  was  expressly  taken 
out  and  who  have  the  right  to  expect  that  the  insurance  fund, 
which  is  their  sole  provision  against  want  after  the  decease 
of  the  breadwinner,  shall  not  have  constantly  hanging  over  it 
an  element  of  uncertainty.  Not  to  protect  a  policy  against 
creditors  may  often  result,  as  has  been  well  said,  "  in  accumu- 
lating trouble  for  a  time  when  misfortune  would  be  amply 
i  abundant." 

Before  leaving  this  subject,  brief  reference  should  be  made 
to  the  beneficiary's  interest  under  a  fraternal  or  mutual  benefit 


402        THE  PRINCIPLES  OF  LIFE  INSUKANCE 

certificate.  Here  the  right  of  revocation  is  usually  reserved 
to  the  insured  by  the  constitution  or  by-laws  governing  the 
members,  and  under  such  circumstances  the  interest  of  the 
beneficiary  is  not  a  vested  one.  But  should  the  rules  or  cer- 
tificate of  the  order  or  society,  or  any  statute,  contain  restric- 
tions as  to  the  classes  of  beneficiaries  that  may  be  named,  the 
holder  of  the  certificate  is  obliged  to  observe  the  same.  It 
has  been  held  that  under  such  conditions  the  properly  named 
beneficiary  can  contest  an  appointment  illegally  made  at  a 
future  time.  In  the  absence,  however,  of  any  right  of  rev- 
ocation by  statute  or  by  the  rules  of  the  association,  or  in 
case  of  a  definite  agreement  with  the  beneficiary  originally 
named,  the  insured  is  precluded  from  substituting  another 
appointment. 

In  industrial  policies,  it  should  be  stated,  it  is  frequently 
the  practice  to  include  a  provision  permitting  the  company 
to  choose  the  beneficiary  under  certain  circumstances.  Usu- 
ally the  clause  is  given  some  such  wording  as  the  following: 
"  The  Company  may  pay  the  amount  due  under  this  policy  to 
either  the  beneficiary  named  below  or  to  the  executor  or  ad- 
ministrator, husband  or  wife,  or  any  relative  by  blood  or  con- 
nection by  marriage  of  the  insured,  or  to  any  other  person 
appearing  to  said  company  to  be  equitably  entitled  to  the 
same  by  reason  of  having  incurred  expense  on  behalf  of  the 
insured,  or  for  his  or  her  burial;  and  the  production  of  a  re- 
ceipt signed  by  either  of  said  persons  shall  be  conclusive  evi- 
dence that  all  claims  under  this  policy  have  been  satisfied/ 
Such  provisions  have  been  repeatedly  upheld  by  the  courts  as 
reasonable  in  this  form  of  insurance.  In  Brennen  v.  Pruden- 
tial Insurance  Company  (170  Pa.  488)  the  court  even  held 
that  "the  company  may  in  its  discretion  and  acting  in  good 
faith  with  the  person  selected  by  it,  settle  for  less  than  the 
amount  of  the  policy,  and  the  personal  representative  of  the 
insured  cannot  recover  from  the  company  the  difference  be- 
tween the  amount  so  paid  and  the  amount  of  the  policy/' 

Rights  of  Creditors  to  Life-Insurance  Policies. —  The 
National  Bankruptcy  Act  expressly  permits  a  bankrupt,  hav- 


LAW  PERTAINING  TO  THE  BENEFICIARY     403 

ing  a  policy  with  a  cash  surrender  value  payable  to  himself,  his 
estate  or  his  legal  representatives,  to  keep  the  policy  free  from 
the  claims  of  creditors  by  paying  such  surrender  value  to 
the  trustee  within  thirty  days  after  the  ascertainment  of  the 
amount.4  Failure  to  do  this,  causes  the  policy  to  pass  to  the 
trustee  as  assets  for  the  benefit  of  creditors.  But  if  the  policy 
has  no  surrender  value,  the  courts  have  held  that  the  trustee 
has  no  interest  therein.  In  Morris  v.  Dobb,  trustee  (110  Ga. 
606),  where  a  husband  took  out  a  policy  payable  to  his  legal 
representatives  and  subsequently  transferred  the  same  to  his 
wife  four  months  prior  to  the  filing  of  a  petition  in  bank- 
ruptcy, the  court  held :  "  A  policy  of  insurance  on  the  life 
of  a  bankrupt  which  has  no  cash  surrender  value,  and  no 
yalue  for  any  purpose  except  the  contingency  of  its  being 
valuable  at  the  death  of  the  bankrupt  if  the  premiums  are 
kept  paid,  does  not  vest  in  the  trustee  as  assets  of  the  estate." 
Moreover,  the  courts  have  held  that  a  state  statute  protecting 
certain  beneficiaries  against  the  claims  of  creditors  takes  pre- 
cedence over  the  National  Bankruptcy  Act.  Thus,  in  Holden 
v.  Stratton  (198  U.  S.  202)  the  court  ruled  that:  "Policies 
of  insurance  which  are  exempt  under  the  law  of  the  state 

*  The  U.  S.  Bankruptcy  Act,  Sec.  70,  provides  that:  "Property 
which  prior  to  the  filing  of  the  petition  he  could  by  any  means 
have  transferred,  or  which  might  have  been  levied  upon  and  sold 
under  judicial  process  against  him,  provided  that  when  any  bank- 
rupt shall  have  any  insurance  policy  which  has  a  cash  surrender 
value,  payable  toNiimself,  his  estate  or  personal  representatives, 
he  may,  within  thirty  days  after  the  cash  surrender  value  has  been 
ascertained  and  stated  to  the  trustee  by  the  company  issuing  the 
same,  pay  or  secure  to  the  trustee  the  sums  so  ascertained  and 
stated  and  continue  to  hold,  own  and  carry  such  policy  free  from 
the  claims  of  the  creditors  participating  in  the  distribution  of  his 
estate  under  the  bankruptcy  proceedings;  otherwise  the  policy  shall 
pass  to  the  trustee  as  assets." 

In  Clark  v.  Equitable  Life  Assurance  Society  (143  Fed.  175) 
the  court  held  that:  "Policies  of  life  insurance  of  a  bankrupt 
having  an  actual  value  pass  to  his  trustee,  and  the  bankrupt  is 
divested  of  all  interest  therein,  unless  he  retains  the  same  under 
the  proviso  of  the  Bankruptcy  Act  of  July  1,  1898,  see  541,  Sec. 
70  (a),  by  paying  the  cash  surrender  value." 


404       THE  PRINCIPLES  OF  LIFE  INSURANCE 

of  the  bankrupt  are  exempt  under  Section  6  of  the  Bankruptcy 
Act  of  1898,  even  though  they  are  endowment  policies  pay- 
able to  the  assured  during  his  lifetime  and  have  cash  sur- 
render values,  and  the  provisions  of  Section  70  (a)  of  the  Act 
do  not  apply  to  policies  which  are  exempt  under  the  state 
law.  It  has  always  been  the  policy  of  Congress,  both  in 
general  legislation  and  in  bankrupt  acts  to  recognize  and 
give  effect  to  exemption  laws  of  the  states."  Following  the 
payment  of  the  policy  to  the  beneficiary,  however,  the  pro- 
ceeds are  subject  to  levy  and  attachment  for  such  beneficiary's 
debts,  just  as  any  ordinary  assets  would  be. 

Some  courts  have  also  emphasized  the  right  and  duty  of  an 
insolvent,  in  the  absence  of  actual  fraud,  to  make  moderate 
provision  for  his  wife  and  children  by  naming  them  as  bene- 
ficiaries in  a  life-insurance  policy.  This  is  clearly  indicated  in 
the  opinion  rendered  in  Central  Bank  of  Washington  v.  Hume 
(128  U.  S.  195),  where  "a  married  man,"  it  was  declared, 
"may  rightfully  devote  a  moderate  portion  of  his  earnings 
to  insure  his  life,  and  thus  make  reasonable  provision  for  his 
family  after  his  decease,  without  being  thereby  held  to  intend 
to  hinder,  delay  or  defraud  his  creditors,  provided  no  such 
fraudulent  intent  is  shown  to  exist,  or  must  be  necessarily  in- 
ferred from  the  surrounding  circumstances."  But  on  this 
point  the  courts  are  by  no  means  a  unit.  Some  hold  that  the 
premiums  paid  by  the  insured  following  his  insolvency  are  ob- 
tainable by  his  creditors ;  while  others  have  ruled  that  creditors 
may  obtain  the  insurance  money  in  the  proportion  that  the  pre- 
miums paid  subsequent  to  the  insolvency  bear  to  the  sum  total 
of  the  premiums  paid  on  the  policy. 

Transmissibility  of  the  Beneficiary's  Interest. —  Where 
the  beneficiary  has  been  named  absolutely  and  without  any 
qualifying  restriction,  the  important  question  arises :  Are 
the  rights  of  the  beneficiary  in  the  policy  such  as  to  pass  to  his 
or  her  representatives  in  case  of  death  before  the  insured  dies  ? 
This  question  may  be  discussed  conveniently  from  two  stand- 
points: (1)  when  all  the  designated  beneficiaries  die  before 
the  insured,  and  (2)  when  some  of  them  die  before  the  insured 


LAW  PERTAINING  TO  THE  BENEFICIARY     405 

but  others  outlive  him.  Assuming  that  the  sole  beneficiary 
designated  in  the  policy  dies  before  the  insured,  is  the  latter 
at  liberty  to  make  a  new  appointment?  Frequently  the  diffi- 
culty is  overcome  by  a  clause  in  the  policy,  as  is  the  case  in 
the  New  York  standard  provision  expressly  providing  to  some 
such  effect  as  this :  "  If  no  beneficiary  shall  survive  the 
insured  the  policy  shall  be  payable  to  the  legal  representatives 
of  the  insured."  Beneficiary  clauses  also  frequently  contain 
stipulations  to  the  effect  that  "  if  any  beneficiary  shall  die 
before  the  insured,  the  interest  of  such  beneficiary  shall  vest 
in  the  insured."  In  the  absence  of  such  provision,  the  courts 
have  disagreed  as  to  the  powers  which  the  insured  may  exer- 
cise in  this  respect.  The  majority  of  decisions  permit  him  to 
make  a  new  appointment  and  this  ruling  is  regarded  as  the 
better  one  by  legal  writers  on  the  subject.5  It  is  contended 
that  since  the  insured^  original  intention  as  to  the  disposition 
of  the  proceeds  of  the  policy  has  failed,  the  power  to  indicate 
a  new  beneficiary  should  revert  back  to  him.  His  original  in- 
tention to  protect  his  wife  and  children,  it  is  argued,  can- 
not be  construed  as  implying  that  he  meant  to  waive  all 
control  over  his  own  policy  in  case  he  should  happen  to  become 
the  sole  survivor.  To  hold  otherwise  would  seem  inequitable 
and  would  likely  prove  ineffective  since  the  insured  could  lapse 
his  policy. 

Now  assuming  in  the  second  case,  that  the  policy  simply 
names  the  "  wife  and  children  "  or  the  "  children  "  as  benefici- 
aries, and  that  it  contains  no  conditions  governing  the  matter, 
how  shall  the  proceeds  of  the  policy  be  shared  when  some  of  the 
designated  beneficiaries  die  before  the  insured  dies  while  others 
survive  him  ?  In  other  words,  are  those  beneficiaries  who  out- 

5  Among  the  states  the  courts  of  which  have  upheld  this  ruling 
may  be  mentioned  the  following:  Alabama  (87  Ala.  263),  Ohio  (50 
Ohio  St.  595),  Missouri  (35  Mo.  App.  178),  New  Jersey  (58  N.  J.  eq. 
189),  New  York  (28  N.  Y.  Hun.  119),  Virginia  (24  Grat.  (Va.) 
497),  and  Wisconsin  (50  Wis.  603). 

Among  the  states  in  which  the  contrary  ruling  holds  may  be 
mentioned  the  following:  Arkansas  (71  Ark.  295),  Indiana  (86 
Ind.  196)  and  Maryland  (95  Md.  101). 


406       THE  PRINCIPLES  OF  LIFE  INSURANCE 

live  the  insured  entitled  to  the  entire  proceeds  of  the  policy,  or 
is  the  interest  of  the  surviving  beneficiaries  still  limited  to  the 
share  which  they  originally  held  under  the  policy,  while  the 
respective  interests  of  those  beneficiaries  who  died  before  the 
insured's  death  pass  to  their  representatives  or  assigns.  Here 
again  the  courts  are  not  in  accord.  Where  the  policy  is  pay- 
able to  "  the  wife  of  the  insured,  if  living,  otherwise  to  their 
children,"  it  is  clear  that  the  interest  of  the  children  is  a 
contingent  one,  depending  upon  the  life  of  the  wife.  But 
suppose  that  the  husband  survives  the  wife,  shall  the  pro- 
ceeds of  the  policy  pass  only  to  those  children  who  survived 
the  mother,  or  shall  all  the  children  living  at  the  time  of  the 
issuance  of  the  contract  participate  in  the  distribution.  Some 
courts  hold  —  sometimes  called  the  New  York  rule  —  that 
only  the  children  surviving  the  mother  come  into  possession  of 
the  entire  policy.6  Other  courts,  however,  follow  the  rule  — 
sometimes  called  the  Connecticut  rule  —  that  all  the  children 
alive  when  the  policy  was  issued  acquire  a  vested  right  therein, 
and  that  the  interest  of  those  dying  before  their  mother  dies 
passes  to  their  representatives.7 

The  Designation  of  the  Beneficiary. —  Judging  from  the 
unusually  large  number  of  court  decisions  which  relate  to  this 
subject,  it  is  apparent  that  the  beneficiary  often  is  designated 
carelessly  in  a  life-insurance  policy,  and  that  because  of  such 
carelessness  the  real  intention  of  the  insured  might  upon  his 
death  be  difficult  to  determine  and  might,  therefore,  possibly 
be  defeated.  It  is  the  general  rule  of  the  courts,  if  at  all 
possible,  so  to  construe  the  language  used  in  designating  the 
beneficiary  as  to  enforce  the  intentions  of  the  parties  thereto. 
But  in  doing  this  the  courts  cannot  set  aside  the  language 
expressly  used  if  the  same  is  not  ambiguous. 

Numerous  illustrations  may  be  cited  as  indicating  the  ne- 

6  Among  cases  upholding  this  rule  may  be  mentioned:      140  Mich. 
233,  68  N.  H.  405,   133  N.  Y.  408,   118*  Ga.  657,  54  Ala.  688,  202 
Pa.  St.   141. 

7  Among  cases  upholding  this  rule  may  be  mentioned  42   Conn. 
60,  89  Iowa  396,  100  Tenn.  297,  135  Mass.  468. 


LAW  PERTAINING  TO  THE  BENEFICIARY     407 

cessity  of  care  in  describing  the  beneficiary.  Thus,  where  the 
policy  is  payable  to  the  insured's  "  children,"  the  term  in- 
cludes those  by  a  former  wife  but  not  his  wife's  children 
by  a  former  husband.  A  policy  payable  "to  the  wife  and 
upon  her  death  before  the  insured  to  ( their  children/  "  does 
not  give  an  interest  to  a  child  by  a  marriage  contracted  by 
the  insured  after  his  first  wife's  death.  Adopted  children  are 
included  in  the  term  "  children/'  and  the  term  "  dependents  " 
is  limited  strictly  to  those  actually  dependent  for  support  upon 
the  insured.  Again  the  term  "  relatives  "  has  been  held  to 
"  include  those  by  marriage  as  well  as  by  blood,  but  not  an 
illegitimate  child  " ;  while  the  term  "  heirs  "  refers  to  "  those 
who  take  under  the  statute  of  descent  and  distribution."  8 

Effect  of  Cessation  of  the  Beneficiary's  Insurable  Inter- 
est in  the  Life  of  the  Insured  Prior  to  Maturity  of  the 
Contract. —  In  the  chapter  on  "  Insurable  Interest "  it  was 
stated  as  a  general  rule  that  a  person  has  an  insurable  interest 
in  his  own  life  and  may  accordingly  insure  that  life  to  any 
amount  and  name  anyone  as  beneficiary  under  the  policy,  even 
though  such  beneficiary  may  not  have  an  insurable  interest 
at  the  time.  The  only  general  exception  to  this  rule,  we  saw, 
consisted  of  those  instances  where  the  policy  is  a  mere  cover 
for  fraud  or  speculative  insurance  and  thus  an  evasion  of  the 
law  against  wagering.  But  assuming  that  the  policy  is 
taken  out  legally  by  one  person  on  the  life  of  another,  or  that 
a  beneficiary  has  been  appointed  who  has  an  insurable  interest 
at  the  time,  will  a  subsequent  loss  of  that  interest  before  the 
maturity  of  the  contract  adversely  affect  the  vested  rights  of 
such  beneficiary  ?  Here  the  prevailing  rule  holds  that  a  policy 
valid  at  its  inception  because  supported  by  an  insurable  in- 
terest will  not,  unless  its  provisions  clearly  stipulate  the 
contrary,  be  affected  thereafter  by  a  loss  of  that  interest  on 
the  part  of  the  beneficiary.  A  married  woman,  for  example, 

a  ELLIOTT,  CHARLES  B.,  Treatise  on  the  Law  of  Insurance  (1903), 
348-387.  A  detailed  list  of  the  numerous  interpretations  which 
American  courts  have  given  to  the  various  terms  that  are  com- 
monly used  in  designating  beneficiaries  in  life-insurance  policies. 


408       THE  PRINCIPLES  OF  LIFE  INSTTBAKCE 

named  as  beneficiary  in  her  husband's  policy  has  been  held  to 
have  the  right  to  maintain  the  existence  of  the  policy  fol- 
lowing a  divorce  and  be  entitled  to  the  proceeds  upon  the  in- 
sured's  death.  Exceptions  to  this  rule  frequently  exist  as 
regards  creditors,  as  noted  in  the  preceding  chapter;  certifi- 
cates or  rules  of  fraternal  and  mutual  benefit  societies,  however, 
usually  provide  that  the  relation  of  husband  and  wife,  or  other 
family  relationship  under  consideration,  must  exist  at  the 
time  of  the  insurer's  death. 


CHAPTER  XXXI 
LAW  PERTAINING  TO  ASSIGNMENT  OF  POLICIES 

There  are  few  types  of  contracts  which  are  so  frequently 
assigned  as  insurance  policies,  and  any  discussion  of  the  sub- 
ject must  distinguish  clearly  the  underlying  difference  between 
the  assignment  of  life  policies  and  the  assignment  of  policies 
in  fire  and  most  other  lines  of  property  insurance.  The  fire- 
insurance  policy,  being  strictly  a  personal  contract,  i.e.  insur- 
ing the  particular  owner  of  the  property  rather  than  the  prop- 
erty itself,  can  be  assigned  only  with  the  consent  of  the  com- 
pany, and  the  standard  fire  policy  now  in  general  use  pro- 
vides that  "the  entire  policy  shall  be  null  and  void  if  without 
the  consent  of  the  company  there  be  an  assignment  of  the 
policy  before  a  loss  takes  place."  In  case,  therefore,  of  the 
transfer  of  insured  property,  the  company  may  refuse  its  con- 
sent to  the  transfer  of  the  policy  to  the  new  owner,  and  if  such 
transfer  of  the  policy  has  been  undertaken  without  the  com- 
pany's knowledge  or  consent,  it  will  be  relieved  of  all  further 
liability.  A  life-insurance  policy,  however,  being  in  the  na- 
ture of  a  chose  in  action,  has  been  held  by  the  courts  to  be 
freely  assignable  for  a  valuable  consideration  in  the  absence  of 
(1)  restrictive  provisions  in  the  policy,  or  (2)  attempts  at 
concealment  of  fraud  or  mere  speculative  insurance.1 

1  ".It  is  desirable  that  the  insured  should  have  the  opportunity 
of  making  free  commercial  use  of  his  life  insurance  as  available 
property,  for  it  may  often  be  convenient  to  secure  money,  by  loan 
or  otherwise,  upon  it.  Unlike  the  case  of  a  fire  policy,  as  before 
shown,  a  life  policy  was  considered  assignable  at  common  law. 
And,  by  the  better  opinion,  a  policy  of  life  insurance  may  be  as- 
signed or  made  payable  to  one  who  has  no  insurable  interest,  if 
the  transaction  is  not  a  mere  cover  for  a  wager.  The  demands 
of  business  quite  outweigh  the  remote  possibility  that  some  un- 
scrupulous assignee  may  succumb  to  the  temptation  of  murdering 

409 


410        THE  PEINCIPLES  OF  LIFE  INSURANCE 

To  hold  otherwise  might  often  diminish  the  value  of  a  life 
policy  to  its  owner  as  a  means  of  securing  credit  or  other 
benefits.  Unlike  a  fire  policy,  the  life-insurance  contract  in 
most  instances  provides  for  payment  upon  death,  an  event 
which  is  certain  to  occur  sooner  or  later.  For  this  reason  the 
courts  have  held  the  life  policy  to  resemble  an  ordinary  chose 
in  action,  and  have  generally  inclined  to  the  view  that  sufficient 
reasons  against  its  assignability  cannot  be  given  so  long  as 
there  is  no  infringement  of  the  vested  rights  of  the  beneficiary. 
But,  as  already  stated,  if  the  assignment  is  based  upon  an  im- 
moral or  illegal  consideration,  the  courts  will  refuse  to  up- 
hold it;  and  cases  are  on  record  where  even  executors  or 
administrators  of  the  insured  have  been  permitted  to  oppose 
the  legality  of  an  assignment  on  such  grounds.  After  death 
has  occurred,  it  may  be  added,  the  interest  in  the  policy  is 
held  to  be  purely  a  chose  in  action  subject  to  assignment  by 
the  beneficiary  without  regard  to  the  "  notice  of  assign- 
ment "  or  any  other  provisions  of  the  policy. 

Policy  Restrictions  Relating  to  the  Assignment  of  Poli- 
cies and  the  Legal  Interpretation  of  the  Same. —  Although 
assignable  in  the  absence  of  restrictive  policy  provisions,  it  is 
the  universal  practice  to-day  of  life-insurance  companies  to 
include  an  assignment  clause  of  some  kind  in  their  policies. 
While  much  variation  exists  in  the  wording  adopted  by  the 
companies,  the  provision  usually  reads  to  the  effect  that  "  no 
assignment  of  this  policy  shall  be  binding  upon  the  company 
unless  in  writing  and  until  filed  at  its  home  office.  The  com- 
pany assumes  no  responsibility  as  to  the  validity  of  any  assign- 
ment." In  many  policies,  however,  the  provision  is  more 
elaborate,  some  companies  stipulating  that  in  addition  to  the 

or  shortening  the  life  of  the  insured  for  the  sake  of  hastening 
payment  of  the  insurance  money.  Moreover,  there  would  seem  to 
be  room  for  the  operation  of  any  such  sinister  designs  regardless 
of  whether  the  assignee  has  an  insurable  interest.  A  creditor,  for 
example,  may  be  quite  as  strongly  tempted,  as  the  donee  of  a  gift, 
to  realize  a  prompt  payment  of  the  insurance  upon  the  life  of  the 
assignor."  RICHARDS,  GEORGE,  Treatise  on  the  Law  of  Insurance, 
527-528. 


ASSIGNMENT  OF  POLICIES  411 

filing  of  the  assignment,  or  a  duplicate  thereof,  the  assign- 
ment must  be  approved  in  writing  by  certain  officers  of  the 
company;  that  the  original  assignment  and  due  proof  of 
interest  must  be  produced  when  the  policy  is  presented  for 
payment,  and  that  all  assignments  shall  be  subject  to  any  in- 
debtedness to  the  company  at  its  home  office. 

Where  an  assignment  has  thus  been  brought  to  the  attention 
jof  the  company  and  has  been  consented  to,  it  is  held  to 
constitute  a  new  contract  between  the  company  and  assignee. 
The  assignee,  however,  simply  obtains  the  rights  of  the  original 
insured  —  i.e.  takes  the  position  of  the  assignor  —  and  is  pro- 
jected only  to  the  extent  that  the  assignor  was  protected  un- 
toer  the  policy.  In  other  words,  the  assignee  takes  only  what 
the  assignor  can  assign,  and  if  the  policy  is  void  at  the  time 
of  assignment  because  of  acts  of  violation  on  the  part  of  the 
assignor,  the  assignee  is  not  in  a  position  to  recover. 

The  assignee's  position  in  this  respect  has  been  greatly  im- 
proved through  the  general  use  of  the  incontestable  clause, 
which,  as  we  have  seen,  protects  the  policy  against  the  acts  of 
the  insured  after  the  lapse  of  a  stipulated  period.  The 
principle,  however,  is  worthy  of  emphasis  in  that  it  ap- 
plies before  the  incontestable  feature  goes  into  operation,  and 
in  so  far  that  it  has  a  most  important  bearing  upon  other  forms 
of  insurance.  In  fire  insurance  ordinary  assignments  of  poli- 
cies are  considered  so  dangerous,  because  of  the  possible  in- 
validity of  the  contract  at  the  time  of  assignment,  that  it 
is  almost  the  universal  practice  for  mortgagees  either  to  insure 
!  their  own  interest  as  mortgagee  or  to  require  the  mortgagor 
to  have,  a  so-called  "  mortgage  clause  "  indorsed  on  the  policy 
protecting  the  premises  offered  as  security  for  the  loan,  which 
provides  that  "  this  insurance,  as  to  the  interest  of  the  mort- 
gagee (or  trustee)  only  therein,  shall  not  be  invalidated  by 
any  act  or  neglect  of  the  mortgagor  or  owner  of  the  within 
described  property,  nor  by  any  foreclosure  or  other  proceed- 
ings or  notice  of  sale  relating  to  the  property,  nor  by  any 
change  in  the  title  or  ownership  of  the  property,  nor  by  the 
occupation  of  the  premises  for  purposes  more  hazardous  than 


412        THE  PRINCIPLES  OF  LIFE  INSURANCE 

are  permitted  by  this  policy,  etc."  In  some  jurisdictions 
the  courts  have  even  held  that  the  indorsement  of  such  a  clause 
does  not  revive  a  policy  already  void  at  the  time  the  indorse- 
ment is  made,  and  for  this  reason  it  is  the  practice  of  cer- 
tain large  lending  institutions  —  a  number  of  life-insurance 
companies  resort  to  the  practice  —  to  require  fire-insurance 
companies  to  consent  by  special  agreement  to  protect  them, 
as  mortgagees,  against  all  acts  and  neglect  of  the  mortgagoi 
whether  occurring  prior  or  subsequent  to  the  issuance  of  the 
mortgage  clause. 

It  should  also  be  observed  that  the  assignment  provisions  oi 
life-insurance  policies  to  which  reference  was  made  do  not 
prohibit  an  assignment  without  consent,  but  simply  provide 
that  the  company  need  not  recognize  the  assignment  until  ii 
has  received  written  notice  of  the  same,  and  that  it  assumes 
no  responsibility  as  to  its  validity.  Nor  does  the  provision 
state  that  an  assignment,  not  consented  to  by  the  company, 
will  invalidate  the  policy.  As  is  well  stated  in  one  case  5 
where  the  court  had  under  consideration  an  assignment  simi- 
lar to  those  mentioned  above :  "  The  consent  of  the  company 
to  an  assignment  is  not  necessary.  All  that  is  required  ig 
that  the  assignment  be  in  writing  on  the  policy,  and  a  copy 
of  it  furnished  to  the  company  within  thirty  days.  This  pro- 
vision is  not  one  which  is  intended  to  guard  against  increased 
risks,  and  does  not  go  to,  or  infuse  itself  into,  the  essence  of 
the  contract.  Its  sole  purpose  is  to  protect  the  company 
against  the  danger  of  having  to  pay  the  policy  twice,  by  re- 
quiring written  evidence  of  any  change  of  beneficiaries  to  be 
put  in  reliable  form  and  promptly  furnished  to  the  com- 
pany. AH  that  could,  at  the  very  most,  be  claimed  as  the 
effect  of  non-compliance  with  this  stipulation  is  that  the 
company  might  disregard  an  attempted  assignment  and  pay 
the  money  to  the  original  beneficiary;  in  other  words,  such 
attempted  assignment  would  be  merely  voidable  at  the  optioD 
of  the  company."  Elliott  in  reviewing  the  cases  affecting 

2  Hogue  v.  Minnesota  Packing  Provision  Company,  59  Minn.  39,  6C 
N.  W.  812. 


ASSIGNMENT  OF  POLICIES  *  413 

notice  of  assignment  to  the  insurer  concludes :  "  At  the  most, 
the  failure  to  give  the  required  notice  invalidates  an  attempted 
assignment,  but  does  not  avoid  the  policy.  A  notice  given 
within  a  reasonable  time  after  an  assignment  is  sufficient,  al- 
though the  insured  may  have  died  in  the  meantime/' 3 

When  the  writing  of  the  assignment  is  required  it  is  un- 
necessary to  use  any  particular  wording,  and  the  content 
of  the  assignment  may  assume  any  form  that  the  parties 
thereto  may  agree  upon,  such  for  example  as  a  special  agree- 
ment between  debtor  and  creditor  as  to  the  final  disposition 
of  any  balance  of  the  proceeds  of  the  policy  after  full  pay- 
ment of  the  actual  indebtedness.  "Where  nothing  to  the 
contrary  is  stipulated  in  the  agreement  of  assignment,  the 
assignee  of  a  policy  held  as  collateral  security  for  a  debt  of 
the  assignor  cannot  dispose  of  the  same  by  sale  or  surrender  to 
the  company  for  its  cash  value,  without  first  giving  the  in- 
sured proper  notice  and  a  reasonable  time  for  redemption. 
Moreover,  actual  delivery  of  the  policy  to  the  assignee  is  not 
necessary  to  make  an  assignment  binding;  in  fact,  the  courts 
have  held  that  the  assignee's  rights  may  be  fully  supported 
even  in  cases  where  neither  the  policy  nor  the  assignment  has 
been  delivered  to  him. 

State  Statutes  Affecting  Assignments  by  Beneficiaries. 
—  In  the  absence  of  restraining  statutes,  beneficiaries  may 
assign  their  contingent  interest  in  a  life  policy,  although  there 
are  legal  cases  affirming  the  position  that  the  holder  of  a 
certificate  in  a  fraternal  or  mutual  benefit  society  may  not 
assign  the  same,  unless  the  restriction  is  waived  by  the  so- 
ciety, to  persons  who  do  not  come  within  the  group  of  per- 
mitted beneficiaries.  Unless  prohibited  by  statute,  even  the 
wife  has  been  held  to  have  the  right  to  assign  her  interest  in 
a  policy  in  order  to  secure  a  debt  of  her  husband.  But,  as 
noted  in  the  preceding  chapter,  some  thirty-five  states  have 
adopted  laws  which  have  for  their  purpose  the  protection  of  the 
interest  of  the  wife  and  children  of  the  insured  by  providing 

s  ELLIOTT,  CHABLES  B.,  Treatise  on  the  Law  of  Insurance,  406. 


414  -    THE  PKINCIPLES  OF  LIFE  INSURANCE 

that  the  proceeds  of  his  life  insurance  made  payable  to  them 
shall  not  be  liable  to  seizure  or  appropriation  for  the  satis- 
faction of  the  claims  of  creditors.  In  New  York  and  Wis- 
consin the  courts  have  construed  such  statutes  as  meaning 
that  the  wife  is  prohibited  altogether  from  assigning  her  in- 
terest ;  while  in  other  states  —  Arkansas.,  Kentucky,  Maryland, 
and  Missouri  —  similar  statutes  were  construed  as  not  pre- 
cluding such  an  assignment.  By  subsequent  enactment,  how- 
ever, the  New  York  law  now  provides  that  "  a  policy  of  insur- 
ance on  the  life  of  any  person  for  the  benefit  of  a  married 
woman,  is  also  assignable  and  may  be  surrendered  to  the  com- 
pany issuing  the  same,  by  her,  or  her  legal  representative,  with 
the  written  consent  of  the  assured/' 

Assignment  of  the  Policy  by  the  Assignee  —  A  Policy 
of  Life  Insurance  Is  Not  a  Negotiable  Instrument. —  Al- 
though an  assignee  cannot,  in  the  absence  of  an  agreement 
to  the  contrary,  sell  or  surrender  the  policy  without  giving 
the  insured  a  reasonable  opportunity  to  redeem  it,  he  may, 
under  proper  circumstances,  reassign  the  policy  to  another. 
Thus,  in  Corcoran  v.  Mutual  Life  Insurance  Company*  it 
was  held  that  where  a  policy  was  given  as  collateral  security 
for  the  payment  of  a  note,  the  holder  has  the  right  to  assign 
the  same  to  the  indorsee  of  the  note,  who  will  then  be  en- 
titled to  hold  the  policy  as  security  for  thevnote. 

But  a  life-insurance  policy  is  not  to  be  regarded  as  a  nego- 
tiable instrument,  as  is  exemplified  by  the  case  of  Brown  v. 
Equitable  Life  Assurance  Society.5  Here  the  insured  as- 
rsigned  a  policy  as  security  for  a  debt,  and  the  assignee  sub- 
sequently assigned  the  same  to  a  bank  as  security  for  an- 
other loan.  The  court  held  that  despite  the  absoluteness  of 
the  form  of  assignment,  "  the  bank  took  the  policy  subject  to 
the  equities  existing  in  favor  of  the  insured,  unless  the  con- 
duct of  the  latter  was  such  as  to  create  an  estoppel."  Ac- 
cording to  the  facts  of  the  case  the  insured  had  neglected  to 

4  183  Pa.  443,  39  Atl.  50,  1898. 
575  Minn.  412,  1899. 


ASSIGNMENT  OF  POLICIES  415 

[pay  premiums  for  eleven  years,  and  during  that  period  had 

i  made  no  effort  to  recover  the  policy.     These  circumstances, 

i  together  with  the  fact  that  the  bank  kept  the  policy  from 

lapsing  by  paying  the  premiums  itself,  caused  the  court  to 

hold  that  the  insured  was  prevented  from  claiming  any  rights 

under  the  policy  as  against  either  the  first  assignee  or  the 

bank. 


CHAPTER  XXXII 
THE  LAW  PERTAINING  TO  THE  AGENT  1 

Life  insurance  being  written  almost  exclusively  by  cor- 
porations, in  most  instances  transacting  business  in  many 
states,  the  agent  is  a  necessary  factor  in  the  successful  prose- 
cution of  the  business.  It  is  also  apparent  that  if  the  agent  is 
to  perform  properly  the  duties  connected  with  the  solicitation 
of  business  on  behalf  of  his  employer  he  must  be  given  a 
certain  amount  of  authority.  To  govern  his  relations  with 
the  company  and  the  public,  there  was  to  begin  with  the  gen- 
eral law  of  agency.  But  there  has  since  developed  a  large 
body  of  statute  and  court  law  dealing  with  insurance  agents 
in  particular,  and  it  is  from  this  law  that  we  are  able  to  com- 
prehend the  status  of  the  life-insurance  agent. 

It  is  a  general  rule  of  law  that  the  position  of  agent  carries 
with  it  authority  to  do  and  say  those  things  and  use  those 
means  which  are  appropriate  to  the  proper  fulfillment  of 
the  services  which  he  is  employed  to  render.  Almost  in- 
variably the  company  gives  its  agents  a  written  commission 
defining  their  authority.  But  the  absence  of  such  written  au- 
thority does  not  relieve  the  company  of  responsibility  for  the 
conduct  of  those  who  are  in  reality  its  agents,  because  to  hold 
otherwise  would  enable  the  insurer  at  any  time  to  avoid  all 
responsibility  for  the  misconduct  or  errors  of  its  agents  by 
simply  sending  them  into  the  field  without  written  authority. 
Agency  is  a  fact  depending  on  circumstances  independent  of 
any  provisions  that  may  exist  in  the  policy  or  application,  and 

i  The  law  pertaining  to  agency  in  life  insurance  being  in  part 
the  same  as  that  relating  to  agency  in  fire  insurance,  about  one- 
third  of  this  chapter  is  a  duplication  of  the  chapter  on  "  Agency  " 
in  the  author's  book,  Property  Insurance. 

416 


LAW  OF  AGENCY  417 

in  cases  where  the  question  has  come  up  for  decision  the 
courts  have  outlined  the  evidence  that  may  be  considered  as 
proof  establishing  the  fact  and  character  of  the  agency.  This 
evidence  may  consist  of  an  express  contract  between  the  com- 
pany and  agent,  as  already  stated,  or  a  recognition  by  the 
company  that  a  certain  person  is  its  agent.  Again,  the  fact 
and  character  of  the  agency  may  be  shown  by  the  possession 
|>f  certain  papers  or  by  other  evidence  from  which  agency 
imay  be  legally  inferred.  It  is  important,  however,  to  note  that 
the  insured  must  not  presume  the  existence  of  the  agency 
relationship,  but  must  satisfy  himself  of  it  and  the  extent  of 
its  character  by  some  tangible  evidence. 

State  Statutes  Regulating  Agents. —  Practically  all  the 
states  have  seen  fit  to  enact  laws  which  define  the  meaning 
•of  the  term  "  agent,"  regulate  the  appointment  and  licensing 
of  agents,  and  prohibit  on  their  part  various  kinds  of  miscon- 
duct. The  statute  law  relating  to  these  three  subjects  may 
briefly  be  summarized  as  follows : 

Definition  of  the  term  "  agent" —  It  was  at  one  time 
the  practice  of  certain  companies  to  employ  agents  without 
written  agreements  and  to  provide  in  their  contracts  or  ap- 
plication forms  that  "  as  regards  all  matters  pertaining  to  the 
application,  the  person  soliciting  the  insurance  is  expressly 
agreed  to  be  the  agent  of  the  insured."  Such  a  practice 
manifestly  afforded  abundant  opportunity  to  the  company 
•io  resist  many  claims  by  simply  considering  the  solicitor  the 
agent  of  the  insured,  thus  placing  all  responsibility  for  the 
agent's  misconduct  or  error  upon  the  insured.  To  preclude 
such  treatment  to  policyholders  the  several  states  soon  found 
it  necessary  to  enact  statutes  which  defined  the  term  "  agent " 
with  particular  reference  to  the  insurance  business.  Such 
statutes  are  held  by  the  courts  to  control  the  situation,  and  thus 
overcome  the  evils  formerly  connected  with  stipulations  in  the 
policy  or  application  which  declared  the  solicitor  to  be  the 
agent  of  the  insured  as  regards  all  matters  relating  to  the 
application  for  a  policy.  A  few  states  even  provide  by  statute 
that  notice  to  the  agent  as  to  the  health,  habits,  or  occupa- 


418       THE  PRINCIPLES  OF  LIFE  INSURANCE 

tion  of  the  insured  shall  be  deemed  notice  to  the  company. 
In  the  great  majority  of  states  a  solicitor  of  life  insurance  is 
expressly  declared  by  statute  to  be  the  agent  of  the  insur- 
ance company  and  not  of  the  insured.  The  law  of  Pennsyl- 
vania, which  will  serve  as  an  example,  provides  that  "  an 
agent  is  a  person,  firm  or  corporation  authorized  in  writing 
by  a  company  to  solicit  or  countersign  or  issue  policies  of 
insurance  on  its  behalf."  A  considerable  number  of  the  states 
have  formulated  the  law  to  the  effect  that  any  person  solicit- 
ing insurance,  or  performing  any  act  in  relation  thereto  shall 
be  deemed  the  agent  of  the  company,  anything  in  the  policy 
to  the  contrary  notwithstanding. 

.  Attention  should  be  called  to  the  distinction,  although  of 
much  less  importance  in  life  insurance  than  in  fire  and  other 
forms  of  property  insurance,  which  the  laws  of  many  states 
make  between  insurance  agents  and  brokers.  As  distinguished 
from  an  agent  a  broker  is  usually  denned  "  to  be  a  person,  not 
an  officer  or  agent  of  the  company  interested,  who,  for  com- 
pensation, acts  or  aids  in  any  manner  in  obtaining  insurance 
for  a  person  other  than  himself."  There  has  always  been 
much  disagreement  between  the  court  decisions  in  the  dif- 
ferent states  as  to  the  legal  position  which  the  insurance 
broker  bears  to  the  insured.  In  some  of  the  states  the  courts 
declare  him  to  be  the  agent  of  the  party  paying  him  for  his 
services,  but  this  rule  necessarily  involves  uncertainty  unless 
the  courts  fix  the  ownership  of  the  fund  from  which  the  broker 
is  compensated.  Other  state  courts  have  declared  the  broker 
to  be  the  agent  of  the  insurer  as  regards  the  payment  of  the 
premium  and  the  delivery  of  the  policy,  but  to  be  the  agent 
of  the  insured  in  all  other  matters  relating  to  the  insurance. 
For  the  greater  protection  of  the  insured  various  states  have 
also  seen  fit  to  pass  laws  which  make  the  broker  the  agent  of 
the  company  for  certain  purposes  and  the  agent  of  the  insured 
for  others.  In  the  great  majority  of  states,  however,  an  in- 
surance broker  is  regarded  as  the  agent  of  the  insured  in  all 
matters.  Where  the  broker  is  thus  declared  not  to  be  an 
agent  of  the  company,  it  is  important  for  the  insured  to  bear 


LAW  OF  AGENCY  419 

in  mind  that  the  broker  is  his  agent,  and  that  consequently 
the  act  or  knowledge  of  the  broker  is  his  act  or  knowledge. 
This  is  especially  true  as  regards  the  payment  of  the  pre- 
mium to  a  broker  who  may  neglect  to  remit  the  same  within 
the  proper  time,  although  the  courts  have  shown  a  disposition 
to  protect  the  insured  in  this  matter  where  it  appears  that  an 
arrangement  existed  whereby  the  broker  made  periodical  set- 
tlement with  the  company  for  premiums  collected. 

Regulation  of  the  appointment  and  licensing  of 
agents. —  Most  of  the  states  have  not  only  made  solicitors  of 
life  insurance  specifically  the  agents  of  the  company,  but  also 
carefully  regulate  their  appointment  and  licensing.  While 
numerous  differences  of  detail  present  themselves  in  the  stat- 
utes of  the  several  states,  the  law  of  Pennsylvania  is  probably 
as  nearly  typical  as  that  of  any  other  state  and  will  be  used 
for  illustrative  purposes.  Thus,  according  to  the  law  of  this 
state,  all  companies  to  which  certificates  of  authority  are 
issued  must  certify  to  the  insurance  commissioner  from  time 
to  time  the  names  of  all  agents  appointed  by  them  to  solicit 
risks  in  the  state,  and  such  agents  may  be  either  individuals, 
copartnerships,  or  corporations.  Before  transacting  any  busi- 
ness each  agent  must  obtain  from  the  commissioner  a  certificate 
showing  that  the  company  has  complied  with  all  the  laws  of 
the  state  and  that  the  agent  has  been  duly  appointed  its  agent. 
In  case  the  agency  is  a  copartnership  or  corporation,  every 
member,  officer  and  director  is  required  to  have  an  individual 
license.  Certificates  to  agents  are  issued  only  upon  writ- 
ten application,  approved  and  countersigned  by  the  company, 
which  must  be  made  upon  a  form  prescribed  by  the  commis- 
sioner, and  which  must  furnish  the  information  he  desires. 
The  commissioner  is  empowered  by  the  law  /'to  refuse  to 
issue  a  certificate  to  any  agent,  or  to  renew  the  same ;  or  he 
may  suspend  or  revoke  any  certificate  when  it  shall  appear  to 
his  satisfaction  that  the  applicant  for  a  certificate,  or  the  agent 
holding  a  certificate,  has,  by  misconduct  or  by  misappropriation 
of  collected  premiums,  or  by  misrepresentation,  or  incomplete 
or  misleading  comparison  of  policies,  oral,  written  or  other- 


420        THE  PRINCIPLES  OF  LIFE  INSURANCE 

wise,  for  the  purpose  of  inducing  or  tending  to  induce  a  policy- 
holder  in  any  company  to  lapse,  forfeit  or  surrender  his  in- 
surance therein,  and  to  take  out  a  policy  of  insurance  in 
another  company  insuring  against  similar  risks,  or  gtherwise, 
proved  to  be  unfit  to  hold  such  certificate."  It  may  be  added 
that  the  law  provides  not  only  for  heavy  fines  in  case  the 
aforementioned  regulations  are  violated,  but  further  declares 
that  the  agent  "  shall  be  personally  liable  on  all  contracts  of 
insurance  unlawfully  made  by  or  through  him  for  or  in  behalf 
of  any  company  not  authorized  to  do  business  in  the  state." 

Prohibition  of  various  kinds  of  misconduct. —  In  ad- 
dition to  the  foregoing  regulations  most  of  the  states  have 
seen  fit  to  regulate  specifically  the  conduct  of  agents  in  at 
least  five  other  important  matters.  Briefly  stated  the  laws  re- 
ferred to  in  this  connection  are  directed  against  and  de- 
signed to  punish  the  following  acts  on  the  part  of  an  agent : 

1.  Rebating  any   portion   of  the   premium  payable  on   a 
policy  or  of  the  commission  thereon,  or  giving  any  other  valu- 
able consideration,  either  directly  or  indirectly,  as  an  induce- 
ment to  insurance.     In  numerous  states  the  statutes  also  pro- 
hibit agents  from  personally  or  otherwise  offering  or  selling 
any  stocks,  bonds  or  other  securities  of  any  insurance  company 
as  an  inducement  to  insurance  or  in  connection  therewith. 

2.  Fraudulent  conversion  or  wrongful  use  of  premiums  col- 
lected. 

3.  Making  any  misrepresentation  or  false  statement  for  the 
purpose  of  securing  a  policy  from  a  company  upon  the  life 
of  any  person. 

4.  Representing  or  advertising  himself  as  the  agent  of  an 
unauthorized  or  fictitious  company. 

5.  Issuing,  circulating  or  using  any  written  or  oral  state- 
ment or  circular  misrepresenting  the  terms   of  any  policy 
issued  or  to  be  issued  by  his  company,  or  making  any  esti- 
mate, with  intent  to  deceive,  of  the  future  dividends  payable 
under  a  policy.     Incomplete  comparisons  with  a  view  to  sell- 
ing a  policy,  or  to  inducing  a  policyholder  in  any  company 
to  lapse  or  surrender  his  insurance  and  to  take  out  a  pol- 


LAW  OF  AGENCY  421 

icy  in  another  company,  are  also  frequently  prohibited  by 
statute. 

Policy  Provisions  Pertaining  to  Agency. —  It  frequently 
happens  that  life-insurance  companies  insert  a  provision  in 
their  policies  or  application  forms  prohibiting  their  agents 
from  in  any  way  altering  the  contract.  Industrial  policies, 
as  has  already  been  noted,  usually  contain  a  provision  to  some 
such  effect  as :  "  No  modification,  change  or  alteration 
hereof  or  indorsement  hereon  will  be  valid  unless  signed  by 
the  president,  a  vice-president,  the  secretary  or  an  assistant 
secretary,  and  no  other  person  is  authorized  on  behalf  of  the 
company  to  make,  alter  or  discharge  this  contract  or  to  waive 
any  forfeiture.  Agents  are  not  authorized  to  waive  any  of 
the  terms  or  conditions  of  this  policy  or  to  extend  the  time 
for  payment  of  premiums  or  other  moneys  due  to  the  company, 
or  to  bind  the  company  by  making  any  promise  or  by  accepting 
any  representation  or  information  not  contained  in  the  ap- 
plication for  this  policy."  Ordinary  life  policies  in  the  case 
of  some  companies  likewise  stipulate,  for  example,  that  "  no 
agent  of  the  company  has  any  authority  to  waive  forfeitures 
or  to  make,  alter  or  discharge  contracts/' 

The  reasonableness  of  stipulations  like  the  above  must  be 
conceded  when  one  takes  into  account  the  fact  that  most  large 
life-insurance  companies  are  represented  by  hundreds  and 
sometimes  thousands  of  agents  and  that  in  the  desire  to  obtain 
business  many  are  often  tempted  to  make  promises  not  cov- 
ered by  the  policy,  or  to  overlook  or  conceal  representations  or 
information  which,  had  the  same  been  known  to  the  company, 
would  have  caused  it  to  refuse  the  issue  of  the  policy.  It 
therefore  seems  reasonable  that  the  companies  should  seek  to 
protect  themselves  against  such  contingencies  by  stating  ex- 
pressly in  the  contract  itself  that  the  agent  is  not  authorized  to 
modify  or  alter  the  policy  in  any  particular.  It  may  be 
added  that  a  similar  clause  is  found  in  fire  and  various  other 
kinds  of  insurance  policies. 

Despite  the  apparent  reasonableness  of  such  policy  provi- 
sions, however,  the  various  court  decisions  are  by  no  means  in 


422       THE  PRINCIPLES  OF  LIFE  INSURANCE 

harmony  as  to  the  legal  force  of  the  same.2  Most  of  the  de- 
cisions deal  with  the  subject  of  oral  waiver  in  its  relation  to 
fire  policies.  Here  most  of  the  state  courts  have  refused  to 
uphold  such  policy  provisions,  and  have  taken  the  position  that 
where  facts  constituting  a  forfeiture  are  known  to  the  agent 
at  the  time  of  the  issue  of  the  policy  the  company  may  not 
consider  the  policy  forfeited.  Various  reasons  have  been  of- 
fered by  the  courts  for  taking  this  view.  One  court  regards 
the  doctrine  "as  peculiar  to  the  law  of  insurance  and  as 
founded  on  the  laudable  design  of  preventing  the  perpetration 
of  a  fraud  through  obtaining  a  premium  by  the  issuance  of 
a  policy  known  to  be  void  ab  initio"  Other  courts  refuse 
to  uphold  the  provision  "  in  the  interest  of  fair  dealing,"  or 
on  the  ground  that  "  if  the  principal  has  inherent,  inalienable 
power  to  waive  either  orally  or  in  writing  so  has  the  agent." 
But  it  should  be  noted  that  in  the  famous  Northern  Assurance 
Company  case,3  characterized  by  Mr.  Richards  as  "  a  decision 
of  perhaps  greater  practical  moment  than  any  other  rendered 
in  the  law  of  insurance  within  half  a  century,"  the  United 
States  Supreme  Court  refused  to  uphold  the  aforementioned 
doctrine  of  oral  waiver  and  repudiated  it  as  fundamentally 
unsound.  Despite  this  decision,  however,  many  state  courts 
have  continued  to  render  opinions  to  the  opposite  effect. 

In  life  insurance  the  state  court  decisions  relating  to  oral 
waiver  on  the  part  of  the  agent  show  the  same  lack  of  har- 
mony that  we  have  noted  in  connection  with  fire  insurance. 
Thus  the  Court  of  California,4  for  example,  approved  and 
followed  the  Northern  Assurance  Company  case,  and  held  that 
where  the  agent  knew  the  applicant  for  insurance  had  had  a 
stroke  of  paralysis,  and  still  permitted  the  policy  to  be  issued 

2  For  a  detailed  discussion  of  the  legal  effect  of  such  provisions 
see  George  Richards'  A  Treatise  on  the  Law  of  Insurance,  193-194, 
206-214,  525-526. 

3  Northern  Assurance  Company  v.  Grand  View  Building  Associa- 
tion,  183  U.  S.  308. 

4  Iverson  v.  Metropolitan  Life  Insurance  Company,   91  Pac.   609. 
For  a  discussion  of  this  and  other  cases  see  Richards'  Treatise  on 
the  Law  of  Insurance,  525. 


LAW  OF  AGENCY  423 

without  the  company  having  knowledge  of  the  fact,  his  knowl- 
edge could  not  be  regarded  as  a  waiver  of  the  forfeiture  since 
the  application  contained  a  stipulation  to  the  effect  that  the 
determination  of  whether  the  policy  should  be  issued  rested 
entirely  with  the  officers  of  the  company.  On  the  other  hand 
there  are  cases  where  the  courts,  with  the  California  and  other 
similar  cases  before  them,  have  rendered  contrary  decisions. 
Moreover,  as  previously  stated,  some  states  seek  to  neutralize 
policy  provisions  like  those  discussed  under  this  heading  by 
enacting  laws  which  make  notice  to  the  agent  notice  to  the 
company  as  regards  the  insured's  health,  habits  and  occupa- 
tion. 

Powers  of  the  Agent. —  A  general  agent's  powers  are  co- 
extensive with  those  of  his  principal  within  the  limit  of  the 
particular  business  or  territory  in  which  such  general  agent 
operates;  while  a  special  agent's  powers  extend  to  all  acts 
necessary  for  the  accomplishment  of  the  particular  transaction 
which  he  is  engaged  to  perform.  If  acting  within  their  ap- 
parent powers,  agents  make  the  company  liable  for  their 
wrongful  or  fraudulent  acts,  omissions,  and  misrepresenta- 
tions. Provided  the  policy  or  application  contains  no  restric- 
tions upon  the  agent's  authority  to  waive  forfeitures  —  and 
even  here  we  have  noted  disagreement  in  the  court  decisions  — 
the  acts  and  knowledge  of  the  agent  in  relation  to  anything 
pertaining  to  the  application  or  policy  are  generally  held  by 
the  courts  to  be  the  acts  and  knowledge  of  the  company,  thus 
estopping  it  from  taking  advantage  of  any  forfeiture  occa- 
sioned by  the  agent's  errors  or  fraudulent  acts. 

While  there  is  not  unanimity  in  the  decisions,  the  weight 
of  authority  is  to  the  effect  that,  in  the  absence  of  restric- 
tions, the  company  is  liable  not  only  for  the  acts  of  its  agents, 
but  also  for  the  acts  and  knowledge  of  the  sub-agents  and 
employees  to  whom  the  agent  has  delegated  authority.  In  in- 
surance it  is  a  common  practice,  and  is  frequently  found 
necessary,  for  agents  to  employ  others  to  assist  them  in 
their  work,  and  having  delegated  authority  to  them,  the 
courts  have  regarded  it  as  "just  and  reasonable  that  insur- 


424       THE  PKINCIPLES  OF  LIFE  INSURANCE 

ance  companies  should  be  held  responsible  not  only  for  acts  of 
their  agents,  but  also  for  the  acts  of  the  agents  employed 
within  the  scope  of  their  agents'  authority."  While  it  may 
be  argued  that  the  company  has  not  authorized  its  agents  to 
delegate  their  authority  to  others,  and  that  it  would  there- 
fore be  an  unreasonable  extension  of  the  company's  liability,  it 
must  be  remembered  that  agents  are  employed  by  the  com- 
panies in  accordance  with  the  usages  and  necessities  of  the  busi- 
ness. 

Agent's  Liability  to  His  Principal  for  Injury  Occa- 
sioned by  Misconduct. —  The  relation  of  the  agent  to  his 
employer  is  such  that  he  must  never  further  his  own  personal 
interests  by  disobeying  or  exceeding  his  instructions.  Any 
misconduct  of  the  agent  makes  him  personally  liable  to  his 
principal  for  the  damage  occasioned.  Among  the  legal  text- 
books announcing  this  principle  we  may  quote  from  Story  on 
Agency,  Section  217 :  "  Whenever  an  agent  violates  his  duties 
or  obligations  to  his  principal,  whether  it  be  by  exceeding  his 
authority  or  by  mere  negligence  or  omission  in  the  proper 
functions  of  his  agency  or  in  any  other  manner,  and  any 
loss  or  damage  thereby  falls  on  the  principal,  he  is  respon- 
sible therefor,  and  bound  to  make  full  indemnity." 

Legal  Effect  of  Agents'  Opinions  on  the  Meaning  of 
Provisions  in  the  Contract. —  In  the  course  of  their  daily 
business  agents  are  frequently  asked  to  express  opinions  on 
the  meaning  of  policy  provisions,  and  it  is  of  the  utmost  im- 
portance that  definite  relations  should  exist  between  the  com- 
pany and. its  agents  as  regards  the  expression  of  such  opin- 
ions. What,  then,  is  the  legal  effect  of  the  agent's  opinion? 
The  general  rule  is  that  no  legal  effect  can  be  given  to  such 
opinions  in  case,  for  example,  they  result  in  misleading  the 
insured  as  to  the  meaning  of  any  policy  provision.  This  view 
is  based  on  the  theory  that  an  agent's  opinion  as  to  the  mean- 
ing of  any  section  of  the  contract  does  not  create  new  or  change 
old  obligations. 


APPENDICES 


APPENDIX  I 

HOW  THE  LIFE-INSURANCE  SALESMAN  SHOULD  VIEW  HIS 
PROFESSION  i 

An  address  delivered  by  the  Author  before  the  Annual  Meeting  of 
the  Baltimore  Life  Underwriters  Association  on  February  20, 
1915,  and  before  the  New  York  Life  Underwriters  Association 
on  February  24,  1915. 

Life-insurance  "  salesmanship "  and  "  profession "  are  en- 
tirely compatible  terms;  in  fact,  they  should  be  synonymous. 
The  time  is  rapidly  drawing  near  when  the  cardinal  idea  un- 
derlying every  business  and  vocation  shall  be  service  to  the 
customer  or  client.  On  every  hand  — among  physicians,  law- 
yers, teachers,  bankers,  investment  houses,  credit  men,  ex- 
porters, brokers  and  many  other  groups  —  there  is  noticeable  a 
distinct  tendency  to  organize  the  component  members  within 
the  group  into  associations  with  a  view  to  standardizing  the 
calling  and  elevating  its  ethical  and  utility  phases.  This  is 
as  it  should  be  and  constitutes  true  progress.  It  is  therefore 
with  pleasure  that  I  have  been  following  the  concerted  ef- 
forts of  life-insurance  salesmen  to  take  stock  of  the  standing 
of  their  group  in  the  community  and  to  combat  the  tempta- 
tions and  meet  the  problems  which  are  so  peculiar  to  their 
calling.  During  the  past  year  I  have  had  my  attention  called 
to  at  least  a  score  of  able  addresses  on  this  subject  delivered 
by  leaders  of  your  vocation.  Throughout  all  I  note  the  same 
general  line  of  thought  —  the  advocacy  of  a  high  standard  of 
honor  and  service.  Many  speak  with  a  frankness  that  is  per- 
fectly amazing.  All  refer  to  the  "  professional  aspects "  of 
the  business.  All  want  it  to  have  the  status  of  a  profession 
and  not  that  of  a  mere  occupation  as  regards  both  the  methods 
pursued  and  the  quality  of  service  rendered.  Practically  all, 
too,  assume  that  in  this  way  alone  can  the  calling  command 

1  This  address  is  based  upon  the  subject  master  discussed  in  the 

S receding  chapters,  and  is  reprinted  to  illustrate  the  way  in  which 
fe-insurance  salesmen  should  pursue  their  profession. 

42.7 


428       THE  PKINCIPLES  OF  LIFE  INSURANCE 

that  general   respect  and   confidence  which    it  should   rightly 
have. 

If  I  may  now  assume  that  the  consensus  of  opinion  is  favor- 
able to  placing  life  insurance  on  the  plane  of  a  profession, 
it  is  important  to  note  that  you  alone  have  it  within  your 
power  to  make  it  so.  All  depends  upon  the  attitude  which  you 
assume  with  reference  not  merely  to  the  sale  of  a  policy,  but 
to  the  whole  broad  question  of  life  insurance  in  its  relation  to 
the  community.  Now  what  shall  that  attitude  be?  In  an- 
swering that  question  we  shall  be  assisted  by  recounting  the 
several  concepts  that  underlie  a  professional  career  and  by  then 
applying  them  to  your  vocation.  Briefly  stated,  four  ideas,  in 
my  opinion,  should  be  present  in  any  definition  of  the  term 
profession.  These  are: 

1.  That  the  vocation  should  be  so  essentially  useful  to  so- 
ciety and  so  noble  in  its  purpose  as  to  inspire  sufficient  love 
and  enthusiasm  on  the  part  of  the  practitioner  to  make  it  his 
life's  work.     One  cannot  regard  highly  the  services  of  a  pro- 
fessional man  who  looks  upon  his  vocation  as  a  side  issue  and 
who  is  not  willing  to  devote  to  its  practice  his  entire  time  and 
his  best  thought  and  energy. 

2.  That  the  vocation  involves  a  science  and  in  its  practice 
an  expert  knowledge  of  that  science. 

3.  That  in  applying  this  expert*  knowledge  the  practitioner 
should  abandon  the  strictly  selfish  commercial  view  and  ever 
keep  in  mind  the  advantage  of  the  client.     Conscientious  and 
disinterested    service  —  proper    advice    and    guidance  —  is    the 
very  essence  of  professional  conduct,  and  in  the  long  run  the 
best  policy. 

4.  That  the  individual  practitioner   should  possess  a  spirit 
of   loyalty  to   his   fellow  practitioners,    of  helpfulness   to  •  the 
common  cause  that  they  all  profess,  and  should  not  allow  any 
unprofessional  acts  to  bring  shame  upon  the  entire  profession. 
Unfortunately  the  public  has  a  habit  of  jumping  to  general 
conclusions,  and  too  frequently  the  selfish  unprofessional  con- 
duct of  a  few  leads  to  a  distorted  and  unfair  view  of  an  entire 
group.     The  Golden,  Rule  is  applicable  in  this  respect  quite  as 
much  as  in  individual  transactions. 

An  application  of  these  four  ideas  to  your  calling  can  leave 
no  doubt  that  the  terms  "  life-insurance  salesmanship "  and 
"  profession "  \re  entirely  compatible.  In  the  first  place,  do 
life-insurance  salesmen  follow  an  inherently  useful  and  noble 
calling,  and  are  they  absolutely  necessary?  Most  decidedly. 


LIFE-INSUKANCE  SALESMANSHIP  429 

;   yes.     Few   institutions,   indeed,    so   vitally   affect   the   average 
;   family,  the  very  basis  of  our  whole  social  structure,  as  life  in- 
surance.    In  fact,  so  intimate  is  this  relationship  that  I  am 
J  accustomed  to  refer  tov  life  insurance  as  a  sacred  duty,  and 
i  as  the  only  absolutely  safe  measure  to  adopt  as  a  means  of 
>  protecting  loved  ones  against  the  want  and  misery  that  may  be 
':  occasioned  by  premature  death;  likewise  to  refer  to  the  de- 
liberate failure  to  provide  such  protection  when  necessary  as 
a  crime,  as  an  act  of  a  gambler,  and  a  swindle  upon  a  de- 
pendent household.     Life  insurance  should  constitute  to-day  a 
substantial  item  in  every  family  budget,  just  like  food,  cloth- 
ing, rent  and  fuel.     It  is  the  only  sure  means  of  eliminating 
one  of  life's  greatest  gambles.     It  alone  enables  a  breadwinner 
to  capitalize  his  value  as  such  for  the  benefit  of  those  who  de- 
pend upon  that  bread.    It  should  do  more  than  any  other  in- 
stitution to  eliminate  the  curse  of  worry.     Not  only  is  it  a 
powerful  agency  for  inculcating  thrift,  but  even  for  the  person 
who  can  save  it  furnishes  the  only  certain  method  of  hedg- 
ing against  the  possibility  of  the  saving  period  being  cut  short. 
Moreover,  life  insurance  may  be  put  to   almost   innumerable 
business   uses,   and   in  this  connection  let   us   remember   that 
family  welfare  and  business  success  are  nearly  always  closely 
interrelated.     As  I  stated  in  my  address  before  the  twenty-fifth 
annual  convention  of  the  National  Association  of  Life  Under- 
writers: "You  have  the  right  to  feel  that  you  are  identified 
with  one  of  the  noblest  professions  in  existence,  ranking  with 
that  of  the  ministry,  law,  medicine  and  teaching.  .  .  .  Where 
the  doctor  fails  to  save  the  head  of  the  family  and  where  the 
pastor  can  only  console,  the  agent  may  feel  the  supreme  sat- 
isfaction of  having  been  responsible  for  effecting  a  contract 
the  proceeds  of  which,  partially  at  least,   continue  the  earn- 
ing capacity  of  the  deceased  and  protect  the  dependents  from 
want.     The  agent  who,  as  the  result  of  a  life's  work,  has  sold, 
let  us  say,  three  or  four  million  dollars'  worth  of  life  insur- 
ance—  yes,    any    agent   whenever    selling   a    policy  —  has    the 
right  to  feel  that  he  has  performed  in  a  practical  way  a  very 
noble  service  to  his  fellow  men  in  staving  off  worry  and  want." 
But    these    facts,    you    will    say,    are    commonplace    truths. 
Yet,  granting  that  they  are  known,  they  are,  as  you  all  can 
testify,   reluctantly  practiced   even  by  those  who   understand. 
One  thing  is  certain :  life  insurance  can  be  widely  disseminated 
only  through  salesmen.     This  is  demonstrated  by  the  results 
attained   by   every   governmental   scheme   of   insurance   which 


430        THE  PRINCIPLES  OF  LIFE  INSURANCE 

is  purely  voluntary  and  permissive  in  character.  On  numer- 
ous occasions,  for  example,  England  has  enacted  laws  provid- 
ing that  the  post  office  savings  banks  might  be  used  as  a 
medium  through  which  the  Government  might  sell  annuities 
and  insurance  contracts.  Purposely,  however,  these  laws  were 
not  compulsory  and  depended  upon  the  voluntary  action  of  the 
public.  What  was  the  result?  During  the  seventeen  years  of 
the  operation  of  the  act  of  1864  only  6,524  life-insurance  con- 
tracts and  only  11,646  annuities  were  sold.  The  act  of  1882  re- 
sulted in  a  similar  showing.  At  the  end  of  the  twenty-fifth  year 
of  its  operation  the  total  number  of  annuity  contracts  in  force 
aggregated  only  2,930  ($297,307)  ;  the  total  insurance  contracts 
only  13,262  ($3,727,000) ;  while  the  average  number  of  annui- 
ties written  per  year  amounted  to  only  2,026  and  of  life-insur- 
ance contracts  to  only  677. 

Now  let  us  turn  to  the  second  concept.  Does  life-insurance 
salesmanship  involve  a  science  and  in  its  practice  an  expert 
knowledge  of  that  science?  The  answer,  again,  must  certainly 
be :  "  Yes."  There  is  probably  no  other  business  subject  which 
because  of  its  complexity  is  so  academic  in  character  and  pre- 
sents so  many  varied  phases  in  its  practical  application.  There 
is  only  one  right  plan  of  life  insurance,  viz,  that  based  on 
sound  mathematical  theory.  A  thorough  grounding  in  that 
theory  is  necessary  to  an  understanding  of  the  scientific  fea- 
tures and  practical  applications  of  the  business  that  underlie 
all  of  the  many  types  of  contracts  sold.  A  knowledge  of  the 
science  of  the  business  alone  makes  possible  the  giving  of 
correct  and  unevasive  answers  to  the  numerous  questions  that 
are  asked  of  agents  and  the  avoidance  on  their  part  of  mean- 
ingless or  unjust  comparisons  between  companies  and  types  of 
policies.  Much  of  the  loose  talk  which  so  many  salesmen  in- 
dulge in  to-day  when  advocating  their  contracts  is  traceable  to 
the  lack  of  a  clear  understanding  of  the  fundamental  principles 
underlying  rate-making,  the  operation  of  and  necessity~for  a  re- 
serve,  the  nature  and  proper  interpretation  of  the  sources  of 
the  surplus  and  of  similar  scientific  features  of  the  institu- 
tion of  life  insurance.  Life-insurance  contracts  also  present 
many  legal  phases  concerning  which  agents  should  be  equipped 
to  give  proper  advice.  They  should  be  in  a  position,  too,  to 
know  and  appreciate  the  numerous  family  and  business  uses 
of  life-insurance  protection.  The  latter,  especially,  affords  a 
boundless  field  for  study  and  thought,  because  there  are  few 
business  men,  indeed,  who  do  not  at  some  time  face  a  busi- 


LIFE-INSURANCE  SALESMANSHIP  431 

ness  situation  the  solution  of  which  would  be  made  simpler 
and  less  hazardous  through  the  medium  of  some  kind  of  life- 
insurance  contract.  A  knowledge  of  the  foregoing  factors  is 
necessary  to  the  salesman  if  he  is  to  be  an  expert  in  his  sub- 
ject and  if  he  is  to  appreciate  fully  his  obligations  to  his 
client.  But,  as  I  recently  stated :  "  It  is  not  expected  that 
agents  should  spend  their  valuable  time  in  always  telling  all 
that  they  know.  The  application  of  knowledge  need  not  nec- 
essarily involve  long  explanations,  except  when  requested,  and, 
like  the  physician,  the  agent  may  diagnose  his  case  and  con- 
scientiously perform  his  service  without  explaining  his  every 
act  in  detail." 

Now  a  few  thoughts  with  reference  to  the  third  concept,  viz, 
that  the  man  who  practices  a  profession  should  abandon  the 
strictly  selfish  commercial  view  and  ever  keep  in  mind  the 
greatest  good  of  the  client.  This  is  the  very  essence  of  pro- 
fessional conduct,  since  the  client,  as  payer,  acknowledges  his 
ignorance  and  dependence  when  he  consults  the  practitioner, 
who,  as  payee,  professes,  impliedly  or  otherwise,  his  expertness 
to  serve.  Let  it  be  remembered  that  it  is  not  the  company 
that  pays  the  commission  and  renewals,  but  the  policyholder ; 
furthermore,  that  such  payments  should  not  be  predicated  upon 
the  consideration  of  mere  friendship.  Service  to  the  policy- 
holder  alone  justifies  the  commission  and  renewals,  and  the 
dignity  of  the  profession  requires  that  they  should  be  earned 
and  not  taken  as  a  gratuitous  favor  from  friend  to  friend. 

Life-insurance  salesmanship  to  be  compatible  with  the  term 
"  profession  "  involves  more  than  the  mere  effecting  of  a  sale. 
It  should  always  involve  a  willingness  to  understand  the  in- 
sured's  needs  for  life-insurance  protection  and  to  guide  and 
assist  him  in  selecting  that  type  of  contract  and  that  form  of 
settlement  which  will  most  advantageously  protect  him  and  his 
beneficiary.  When  about  to  complete  the  sale  of  a  contract, 
it  might  be  well  to  pause  just  a  moment  and  ponder  on  this 
thought :  Have  I  effected  a  transaction  which  I  conscien- 
tiously believe  to  be  the  best,  in  view  of  the  circumstances, 
that  I  can  make  for  the  insured  and  his  beneficiary,  and  has 
my  recommendation  been  wholly  uninfluenced  by  the  desire  to 
increase  my  own  compensation?  A  disregard  of  this  serious 
view  of  your  vocation  may  be  likened  to  that  of  the  lawyer 
who  aims  to  enlarge  his  fee  by  unnecessarily  counseling  a 
long  drawn-out  procedure;  to  that  of  the  physician  who  un- 
duly prolongs  the  period  of  attendance,  or  to  that  of  the 


432       THE  PRINCIPLES  OF  LIFE  INSURANCE 

teacher  whose  instruction  is  grossly  imperfect  or  behind  the 
times.  It  is  the  absence  of  this  high  motive  which  soon  causes 
a  representative  of  any  noble  vocation  to  look  upon  it  as  a 
"  game,"  and  it  is  sickening  to  hear  so  many  reveal  their  at- 
titude by  casually  referring  to  the  "  game "  of  the  business  in 
which  they  are  engaged.  Such  language  and  such  thoughts 
should  be  ostracized  in  the  field  of  life  insurance. 

Numerous  ways  of  serving  the  insured  have,  no  doubt,  sug- 
gested themselves  to  you  during  the  years  of  your  experience. 
So  much  has  been  said  and  written  recently  about  "fitting" 
the  form  of  policy  —  whether  term,  whole-life,  limited-pay- 
ment, endowment,  etc. —  that  I  shall  not  emphasize  this  phase 
of  the  subject.  But,  besides  familiarizing  himself  with  the  cir- 
cumstances surrounding  the  insured  and  assisting  him  to  se- 
lect the  right  type  of  policy,  there  are,  in  my  opinion,  two 
matters  which  the  agent  should  bear  in  mind  at  the  time  of 
effecting  the  sale.  These  two  things  are  not  generally  known 
and  appreciated  by  the  public,  and  advice  in  regard  to  them 
is,  therefore,  desirable.  The  primary  purpose  of  life  insurance 
is  the  protection  of  the  family,  and  where  a  wife,  children 
or  other  dependents  are  named  as  beneficiaries,  it  is  highly 
important  that  the  real  purpose  of  the  policy,  viz,  their  pro- 
tection, shall  be  realized.  To  this  end  the  agent  should  be 
sure,  in  my  opinion,  to  do  two  things: 

1.  He  should  bring  clearly  to  the  attention  of  the  insured 
the  importance  of  properly  safeguarding  the  proceeds  of  the 
policy  upon  its  maturity.  He  should  explain  the  advantages 
of  the  ordinary  and  continuous  installment  policies  and  should 
contrast  these  with  other  forms  of  settlement,  and  with  other 
methods  of  investment  as  regards  safety,  economy  and  con- 
venience. The  longer  I  study  life  insurance  the  more  firmly 
do  I  believe  in  the  advantages  and  efficiency  of  income  poli- 
cies. It  is  stated  on  good  authority  that  about  60  per  cent, 
of  the  insurance  funds  left  to  beneficiaries  is  lost  through  bad 
investment  or  dissipation  within  six  years  following  the  death 
of  the  insured.  This  experience  is  also  true  of  other  funds 
left  to  the  beneficiary.  On  every  hand  we  can  point  to  exam- 
ples illustrating  how  easily  and  frequently  the  competency 
which  a  husband  or  father  has  provided  through  saving  or  in- 
surance is  lost  or  foolishly  spent  by  the  heir  or  beneficiary. 
Modern  income  policies,  especially  where  the  circumstances  jus- 
tify the  use  of  the  continuous  income  feature,  are  a  guarantee 
against  such  a  calamitous  contingency.  To  bring  this  matter  i 


LIFE-INSURANCE  SALESMANSHIP  433 

convincingly  to  the  attention  of  each  applicant  for  insurance 
is  a  real  service. 

2.  The  agent,  in  my  opinion,  should,  for  the  sake  of  the  fam- 
ily, give  to  the  policyholder  a  clear  understanding  of  the  legal 
significance  of  the  privilege  reserved  in  the  policy  of  changing 
the  beneficiary  at  will.     The  right  of  revocation  is  treated  dif- 
ferently in  the  contracts  of  different  companies.     Many  con- 
tain  a  printed  provision  reserving  to   the   insured   the  right 
of  revocation  at  will,  usually  on  the  ground  that  such  a  prac- 
tice is  supported  by  reasons  of  expediency  and  equity,  in  that 
the  insured  should,  as  a  matter  of  right,  have  the  privilege  of 
controlling  his   policy.     The  primary   purpose   of   life   insur- 
ance, however,  is  to  protect  the  members  of  the  family  named 
as  beneficiaries,  and  the  change  of  beneficiary  clause  should, 
therefore,   be   viewed   from   the   standpoint   of   the    claims   of 
f  creditors.     Judging  from  recent  court  decisions,  it  is  probable 
that  a  clause  reserving  full  power  to  the  insured  to  change 
the  beneficiary  at  will  subjects  the  policy  to  the  claims  of  cred- 
itors and  causes  it,   in  case  of  the  insured's  bankruptcy,  to 
pass  by  order  of  the  court  to  his  assignees.     Reference  is  fre- 
quently made  to   the   decision  of  the  United   States   Circuit 
Court  of  Appeals  on  Nov.  9,  1909.     (In  re   White,  174  Fed. 
i  333.)     In  this  case  the  court  even  held  that  a  policy  which 
\  is  not  the  absolute  property  of  a  married  woman  or  her  chil- 
dren is  not  exempt  from  the  operation  of  the  National  Bank- 
I  ruptcy  Act  by  virtue  of  the  law  of  New  York,  which  was  en- 
j  acted  for  the  protection  of  the  interest  of  a  married  woman 
;  and  her  children  in  the  husband's  policy  against  the  claims  of 
'his  creditors. 

In  view  of  this  tendency  to  interpret  a  transferable  bene- 
•  ficiary  clause  as  giving  the  trustee  in  bankruptcy  the  power  to 
distribute  the  cash  value  of  a  policy  among  creditors,  it  fol- 
lows that  a  policy  taken  out  for  family  protection,  if  contain- 
ing such  a  clause,  will  have  connected  with  it  a  hazard  that 
the  insured,  in  view  of  the  future  possibility  of  bankruptcy, 
should  bear  in  mind  and  carefully  consider.  The  introduc- 
tion of  a  clause  giving  the  insured  a  free  hand  to  change  the 
beneficiary,  or  to  surrender  the  policy  or  use  it  for  borrowing 
purposes,  introduces  an  element  of  uncertainty  in  a  contract 
that  in  most  instances  should  be  made  absolutely  secure  for 
the  benefit  of  those  for  whose  protection  it  was  expressly  taken 
out  and  who  have  the  right  to  expect  that  the  insurance  fund, 
which  is  their  sole  provision  against  want  after  the  decease 


434        THE  PRINCIPLES  OF  LIFE  INSURANCE 

of  the  breadwinner,  shall  not  have  constantly  hanging  over  it 
an  element  of  uncertainty.-  Not  to  protect' a  policy  against 
creditors  may  often  result,  as  has  been  well  said,  "  in  accu- 
mulating trouble  for  a  time  when  misfortune  would  be  amply 
abundant."  The  possibilities  of  future  bankruptcy  do  not 
seriously  occupy  the  thoughts  of  the  average  person,  yet  sta- 
tistics reveal  a  surprisingly  large  number  of  business  failures. 
Computations  show  that  during  the  past  thirty  years  the  num- 
ber of  actual  business  failures  as  compiled  by  Bradstreet, 
averages  annually  1  per  cent,  of  the  total  number  of  businesses 
listed  by  this  organization.  As  has  been  well  said,  "  The  prob- 
ability of  business  mortality  is  as  great  as  that  of  adult  hu- 
man mortality  at  its  average  age.  In  fact,  it  is  identical 
with  the  1  per  cent,  shown  by  the  American  tables  of  mor- 
tality on  selected  lives  at  age  41."  It  is  also  noteworthy  that 
in  a  year  like  1907  about  19  per  cent,  of  the  total  number  of 
failures  and  over  55  per  cent,  of  the  failure  liabilities  were 
traceable  to  disasters,  failure  of  apparently  solvent  debtors, 
and  undue  competition,  i.e.,  causes  which  cannot  be  regarded 
as  due  to  faults  of  those  who  fail.  On  the  other  hand,  nearly 
65  per  cent,  of  the  total  number  of  failures  in  that  year  were 
either  due  to  incompetency  or  lack  of  capital. 

If  the  foregoing  contentions  are  correct,  I  am  inclined  to 
favor  the  attitude  of  those  companies  which  purposely  omit 
a  change  of  beneficiary  clause  in  their  contracts,  and  which 
require  the  insured  to  specifically  state  his  wishes  in  regard 
to  this  privilege.  While  the  right  of  revocation  and  the  re- 
fusal to  give  the  beneficiary  a  vested  interest  in  the  policy 
may  in  occasional  instances  prove  very  useful,  I  feel  that  the 
applicant's  attention  should  be  called  by  the  agent  to  the  fact, 
as  one  company  has  recently  stated,  that  "  a  policy  contain- 
ing the  unconditional  reservation  of  the  right  to  change  the 
beneficiary  produces  an  instrument  identical  with  the  one  in 
which  the  estate  is  made  the  beneficiary."  Then,  if  the  ap- 
plicant still  insists  on  having  the  privilege,  it  should  be  freely 
granted.  But  under  those  circumstances  the  insured  asked  for 
the  privilege  with  an  understanding  of  what  he  was  doing 
and  what  his  request  might  mean  to  himself  and  family  in  the 
future. 

In  addition  to  the  foregoing  factors  permit  me  to  offer  one 
more  suggestion  relative  to  the  agent's  service  to  his  client. 
Is  this  service  completed  when  the  policy  is  sold  and  issued, 
or  should  the  agent,  if  the  circumstances  permit,  consider  that 


LIFE-INSUKANCE  SALESMANSHIP  435 

his  advisory  relation  to  the  insured  and  the  beneficiary  still 
continues  £  According  to  my  way  of  thinking,  the  latter  is 
desirable,  and  most  consistent  with  the  dignity  of  the  profes- 
sion, and  in  the  long  run,  with  the  welfare  of  the  agent  him- 
self. Here,  again,  your  experience  has,  no  doubt,  suggested 
numerous  ways  of  serving  the  insured.  But  having  in  mind 
again  the  primary  purpose  of  life  insurance  as  a  protection 
to  the  family,  I  would  like  to  call  attention  to  two  forms  of 
service.  After  life  insurance  has  been  acquired  it  is  essen- 
tial that  its  protection  should  be  conserved.  As  you  know, 
this  protection  may  be  lost  (1)  before  the  maturity  of  the 
•contract,  and  (2)  after  such  maturity.  My  two  suggestions 
.apply,  respectively,  to  these  two  contingencies.  In  the  first 
place,  it  has  become  a  common  habit  to  borrow  on  policies. 
The  loan  privilege  is  necessary  and  has  its  proper  uses,  but  in 
ever  so  many  instances  the  privilege  is  exercised  because  some 
unnecessary  luxury  is  desired,  or  because  the  security  market 
seems  low,  or  because  some  other  apparent  opportunity  to  make 
money  quickly  seems  to  present  itself.  And  even  where  these 
considerations  are  not  the  motive,  the  insured  frequently  uses 
this  asset  because  it  is  so  easily  obtained,  never  considering 
at  the  time  the  relation  of  that  asset  to  his  beneficiary  and 
often  overlooking  some  other  available  asset  which  should  have 
been  used  in  preference  to  the  cash  value  of  his  policy.  The 
enormous  increase  in  policy  loans  in  recent  years  would  war- 
rant this  conclusion.  Between  1903-1913  loans  against  poli- 
cies for  the  260  companies  referred  to  in  the  Insurance  Year 
Book  increased  313  per  cent.,  as  compared  with  an  increase 
of  only  106  per  cent,  in  total  admitted  assets  and  73  per  cent, 
in  total  insurance  in  force.  In  other  words,  loans  against 
policies  increased  relatively  nearly  three  times  as  fast  as  as- 
sets and  about  four  and  one-third  times  as  fast  as  the  volume 
of  insurance.  In  the  last  four  years  the  increase  in  such  loans 
aggregated  approximately  $212,000,000,  or  over  20  per  cent,  of 
the  increase  in  admitted  assets  during  the  same  four  years. 

Much  attention  has  been  given  of  late  to  this  alarming  sit- 
uation, and  an  educational  campaign  may  do  much  to  coun- 
teract this  undesirable  tendency.  But  it  seems  to  me  that  in 
this  respect  nothing  can  take  the  place  of  the  agent  who  has 
negotiated  the  contract  and  who,  if  again  placed  in  touch  with 
his  client  at  the  time  the  loan  is  contemplated,  can  emphasize 
to  him  such  facts  as :  "  Life  insurance  should  be  regarded  as 
a  sacred  possession  to  be  mortgaged  only  in  case  of  extreme 


436        THE  PRINCIPLES  OF  LIFE  INSURANCE 

necessity " ;  "  borrowing  on  the  policy  depreciates  its  value, 
in  the  great  majority  of  instances  results  in  a  lapse  and  de- 
feats the  original  purpose  the  policy  was  intended  to  serve," 
and  "  borrowing  on  the  policy  if  not  actually  necessary  is  an 
act  of  flagrant  injustice  to  the  beneficiary."  Such  arguments, 
if  amplified  and  forcibly  presented,  are  apt  to  prevail,  espe- 
cially if  the  agent  renders  the  further  service  of  ascertaining 
and  suggesting  the  use  of  some  other  asset  which  the  insured 
may  possibly  have  available  for  his  pressing  requirements. 
These  remarks,  of  course,  are  based  on  the  assumption  that 
almost  the  last  thing  a  man  should  mortgage  is  the  life  in- 
surance taken  out  by  him  for  the  protection  of  a  dependent 
household. 

Secondly,  the  agent  is  afforded  another  opportunity  for  serv- 
ice by  advising  the  beneficiaries  under  his  client's  policies  in 
respect  to  the  safeguarding  of  the  proceeds.  As  already 
stated,  about  60  per  cent,  of  insurance  funds  are  lost  by  the 
beneficiary  within  six  years  following  the  insured's  death.  If 
the  client  did  not  avail  himself  of  an  income  policy,  there 
is  special  need  to  keep  the  lump  sum  payment  intact  and  to 
conserve  its  income-producing  capacity.  Here  a  knowledge  of 
conservative  investment  is  a  desirable  feature  of  an  agent's 
equipment.  Placing  this  knowledge  at  the  beneficiary's  dis- 
posal will  be  appreciated  and  warmly  recommended  to  acquaint- 
ances. 

Lastly,  let  me  refer  briefly  to  the  fourth  concept  underly- 
ing professional  conduct,  namely,  that  the  life-insurance  sales- 
man should  be  actuated  by  a  spirit  of  loyalty  to  his  fellow 
insurance  men  and  of  helpfulness  to  the  institution  of  life 
insurance  and  enthusiasm  for  the  greatest  possible  dissemina- 
tion of  its  benefits.  General  compliance  with  our  several  con- 
cepts of  professional  conduct  will  be  the  surest  means  of  pro- 
tecting the  entire  group  against  distorted  and  unfair  views 
of  the  public.  But  even  more  than  professional  conduct  is 
required.  You  should  ever  be  students  and  teachers  of  your 
subject.  Never  forget  the  close  relationship  between  the  the- 
ory of  life  insurance  and  its  practice.  "  In  the  pursuance  of 
your  vocation,"  as  I  stated  on  a  former  occasion,  "  despite  the 
fact  that  you  are  justified  in  viewing  your  efforts  from  the 
standpoint  of  commercial  gain,  you  nevertheless  are  and  al- 
ways will  be  as  a  class  essentially  teachers,  persuaders  of  men 
and  the  missionaries  of  a  noble  propaganda.  If  this  view  is 
correct,  it  follows  that  the  more  you  know  about  your  com- 


LIFE-INSUKANCE  SALESMANSHIP  437 

plex  subject  the  better  for  the  people  whom  it  is  your  duty 
to  serve.  The  agent  should  not  only  be  a  student  as  well  as 
a  teacher  all  his  life,  but  he  should  grasp  the  truth  of  the 
saying  that  '  theory  without  practice  to  test  it,  to  verify  it, 
to  correct,  is  idle  speculation;  but  practice  without  theory  to 
animate  it  is  mere  mechanism.  In  every  art  and  business  the- 
ory is  the  soul  and  practice  the  body/  " 

It  has  been  said  that  "nine-tenths  of  the  man  exists  above 
the  shoulders."  It  is  the  part  above  the  shoulders  that  needs 
to  be  developed  and  kept  abreast  of  the  times  if  the  service 
idea  is  to  be  given  the  widest  and  most  beneficent  applica- 
tion. Constant  study  will  better  fit  you  to  know  the  innumer- 
able uses  of  life  insurance,  and  to  know  your  contract,  your 
client,  and  the  technical  phases  of  your  subject  in  its  rela- 
tion to  your  field  work.  It  will  give  you  power  and  cause 
you  to  love  and  respect  your  calling.  It  will  set  you  to  think- 
ing, and  with  the  mind  centered  on  the  subject,  suggestions 
will  come  from  the  most  unexpected  sources.  And  do  not  re- 
strict your  studies  to  too  narrow  a  groove.  Kather  acquaint 
yourselves  also  with  a  knowledge  of  investments  and  with  the 
facts  surrounding  the  organization  and  management  of  various 
business  activities,  especially  in  view  of  the  growing  importance 
of  so-called  "business  life  insurance." 

In  closing  let  me  make  the  further  suggestion  that  each  and 
all  of  you  do  your  share  as  promoters  and  teachers  of  life- 
insurance  education  to  help  cover  this  nation  with  life  insur- 
ance. Life-insurance  education  among  the  masses,  I  feel,  has 
become  firmly  rooted  and  is  a  powerful  movement.  It  is  im- 
portant that  you  should  assist  in  getting  this  subject  on  the 
program  wherever  and  whenever  possible,  and  in  having  it 
properly  presented  from  the  pulpit  and  lecture  platform  and 
in  the  schools,  colleges  and  press.  Note  the  great  and  disin- 
terested educational  work  that  the  medical  profession  is  doing 
in  preventing  loss  of  life  and  misery  through  disease.  That 
is  the  right  spirit,  and  it  should  also  be  your  aim  to  educate 
the  public  in  protecting  itself  against  the  loss  and  misery  occa- 
sioned by  the  premature  death  or  improvidence  of  its  productive 
members.  You,  however,  may  proceed  with  the  certain  knowl- 
edge that  your  efforts  along  this  line  will  not  only  raise  your 
calling  in  the  estimation  of  the  community,  but  will  result  ad- 
vantageously to  yourselves. 


APPENDIX  n 

SPECIMEN  COPY  OF  AN  ORDINARY  WHOLE-LIFE  POLICY 
TOGETHER  WITH  THE  FORM  OF  APPLICATION 

FORM  OF  POLICY 

THE  LIFE  INSURANCE  COMPANY 

No. 


Age 

85 
In  Consideration  of  the  payment  of 

Twenty-six  and  88/100  Dollars,  the  receipt  whereof  is  here- 
by acknowledged,  and  of  the  annual  payment  of  a  like  sum  to 
the  said  Company,  on  or  before  the  twenty -first  day  of  April 
in  every  year  during  the  lifetime  of  John  Doe,  of  Philadel- 
phia, Pennsylvania,  (hereinafter  called  the  Insured),  promises, 
upon  receipt  of  due  proof  of  the  death  of  the  Insured,  to  pay 
at  its  Home  Office  unto  his  wife  Jane  Doe,  Beneficiary  the 
sum  of  One  Thousand  Dollars,  less  any  unpaid  premium  or 
premiums  for  the  then  current  policy  year  and  any  other  in- 
debtedness on  account  of  this  Policy;  provided,  however,  that 
if  there  be  no  Beneficiary  or  Contingent  Beneficiary  surviv- 
ing the  Insured,  such  payment  unless  otherwise  directed  by 
the  Insured  and  endorsed  by  the  Company  on  this  Policy  shall 
be  made  to  the  executors,  administrators  or  assigns  of  the  said 
Insured. 

Subject  to  the  Eights  of  any  Assignee  and  With  or  With- 
out Reserving  the  Right  of  Revocation,  the  Insured,  (1)  may 
designate  a  Beneficiary  or  Beneficiaries  if  none  be  named  in 
this  Policy,  or  in  the  event  of  the  death  of  any  person  desig- 
nated; (2)  and  may  designate  a  Contingent  Beneficiary  or 
Beneficiaries  whose  interest  shall  be  as  expressed  in,  or  by  en- 
dorsement of  the  Company  on,  this  Policy;  (3)  and  may  change 
any  Beneficiary  or  Contingent  Beneficiary  not  irrevocably 
designated.  If  there  be  more  than  one  Beneficiary  the  inter- 
est of  any  deceased  Beneficiary  shall  pass  to  the  survivor  or 
survivors  unless  otherwise  directed  by  the  Insured  and  en- 
dorsed by  the  Company  on  this  Policy.  No  designation,  di- 

438 


SPECIMEN  LIFE  POLICY  439 

Section,  revocation  or  change  shall  be  effective  unless  duly  made 
in  writing,  and  filed  at  the  Home  Office  of  the  Company  (ac- 
companied by  the  Policy  for  suitable  endorsement)  prior  to  or 
at  the  time  this  Policy  shall  become  payable. 

No  Assignment  of  this  Policy  shall  be  binding  upon  the 
Company  until  it  be  filed  with  the  Company  at  its  Home  Of- 
fice. The  Company  assumes  no  responsibility  as  to  the  valid- 
ity of  any  assignment,  and  satisfactory  proof  of  assignee's 
interest  must  be  produced  on  making  claim. 

This  Policy  is  issued  and  accepted  by  the  parties  in  inter- 
est subject  to  the  provisions  stated  on  the  second  and  third 
pages  hereof  which  are  a  part  of  this  contract. 

In  Witness  Whereof,  THE INSURANCE  COMPANY, 

of , ,  has  by  its  President  and  Secretary  executed  this 

contract,  this  twenty-first  day  of  April,  one  thousand  nine  hun- 
dred and  fifteen. 

,  President. 

. . ,  Secretary. 

PROVISIONS 

1.  Policy  and  Application  Entire  Contract.    This  Policy 
and  the  application  therefor   (a  copy  of  which  is  attached  to 
this  Policy  when  issued)  constitute  the  entire  contract  between 
the  parties  hereto.     All  statements  made  by  the  Insured  shall, 
in  the  absence  of  fraud,  be  deemed  representations  and  not 
warranties,  and  no  statement  of  the  Insured  shall  avoid  this 
Policy  or  be  used  in  defense  to  a  claim  thereunder  unless  it 
is  material  and  is  contained  in  the  said  application. 

2.  Agents.     No  agent  of  the  Company  has  any  authority 
to  waive  forfeitures  or  to  make,  alter  or  discharge  contracts. 

3.  Reserve.     The  reserve  on  this  Policy  and  any  dividend 
additions  thereto   shall  be  in   accordance  with   the   American 
Experience  Table  of  Mortality  with  interest  at  three  per  cent. 

4.  Suicide.     If  within  one  year  from  the  date  hereof  the 
Insured  shall,  whether  sane  or  insane,  die  by  his  own  hand, 
the  liability  of  the  Company  under  this  Policy  shall  be  limited 
to  the  amount  of  the  reserve  hereon. 

5.  Incontestability.     This    Policy    shall    be    incontestable 
after  one  year  from  its  date  except  for  non-payment  of  pre- 
mium, provided,  however,  that  if  the  age  of  the  Insured  has 
been  misstated,  and  the  error  shall  not  have  been  adjusted  dur- 
ing his  lifetime,  the  amount  payable  hereunder  shall  be  such 


440        THE  PRINCIPLES  OF  LIFE  INSURANCE 

as  the  premium  paid  would  have  purchased  at  the  correct  age. 

6.  Premium  Payments.     The  insurance  under  this  Policy 
is  based  upon  annual  premiums  payable  in  advance,  but  pay- 
ments may  be  made  semi-annually  or  quarterly,   in   advance, 
at  the  premium  rates  therefor  now  in  use  by  the  Company, 
and  change  from  the  mode  selected  to  either  of  the  other  of 
such  modes  may  be  made  on  any  anniversary  of  the  Policy. 
No  premium  after  the  first  shall  be  considered  paid  (except  it 
be  duly  charged  as  a  premium  loan)  unless  a  receipt,  signed 
by  the  President  or  Secretary  of  the  Company  and  counter- 
signed by 'an  agent  authorized  to  receive  such  premium,  shall 
be  given  therefor.     Should  default  be  made  in  the  payment  of 
any  premium  this  Policy  shall  cease  and  determine  except  as 
hereinafter  otherwise  provided. 

7.  Grace.     A  grace  of  thirty-one  days,  during  which  time 
the  insurance  shall  remain  in  full  force,  will  be  allowed  for  the 
payment  of  every  premium  except  the  first. 

8.  Reinstatement.     This  Policy  will  be  reinstated  at  any 
time   within   five   years   succeeding   default   in   premium   pay- 
ment, upon  evidence  satisfactory  to  the  Company  of  the  in- 
surability of  the  Insured  and  payment  of  all  premium  arrears 
with  interest  at  the  rate  of  five  per  cent,  per  annum,  and  the 
payment  or  reinstatement  of  any  indebtedness  which  existed 
at  the  time  of  such  default  with  interest  from  that  date. 

9.  Dividend  Options.     This  Policy  while  in  force  except  as 
extended  term   insurance   shall  participate   in  the   surplus   of 
the  Company  and  the  Company  will  annually  determine  and 
account  for  the  divisible  surplus  accruing  hereon  until  all  sur- 
plus found  to  have  arisen  from  this  Policy  shall  have  been  re- 
turned. 

The  current  dividend  each  year,  at  the  option  of  the  owner 
of  the  Policy,  may  be:  (a)  withdrawn  in  cash;  or  (b)  applied 
to  the  payment  of  premiums;  or  (c)  applied  to  the  purchase 
of  non-forfeitable  participating  paid-up  additions  to  the  Pol- 
icy; or  (d)  left  to  accumulate  to  the  credit  of  the  Policy  and 
withdrawable  on  any  anniversary  thereof,  at  such  rate  of  in- 
terest not  less  than  three  per  cent.,  credited  annually,  as  may 
be  determined  by  the  Company.  Unless  the  owner  of  the  Pol- 
icy shall  otherwise  elect  in  writing,  dividends  will  be  paid  in 
cash. 

10.  Paid-up  and  Endowment  Options.    Whenever  the  re- 
serve on  this  Policy  and  existing  dividend  additions  at  the  end 
of  any  policy  year  shall  equal  or  exceed  the  net  single  pre- 


SPECIMEN  LIFE  POLICY  441 

mium  for  the  attained  age  of  the  Insured  by  the  American  Ex' 
perience  Table  of  Mortality  with  interest  at  three  per  cent, 
for  an  amount  of  insurance  equal  to  the  face  amount  of  this 
Policy,  the  Company,  at  the  written  request  of  the  Insured, 
will  endorse  the  Policy  (subject  to  any  existing  indebtedness) 
as  participating  paid-up  insurance  for  such  an  amount  as  the 
saicl  reserve  will  purchase  at  the  premium  named;  or,  when- 
ever said  reserve  at  the  end  of  any  policy  year  shall  equal  or 
exceed  the  face  amount  of  this  Policy,  the  Company  upon  a 
full  and  valid  surrender  of  the  Policy  and  all  claims  there;- 
under  will  pay,  as  a  matured  endowment,  the  amount  of  said 
reserve  less  any  existing  indebtedness  to  the  Company  on  ac- 
count of  this  Policy. 

11.  Non-Forfeiture  and  Loan  Features.  The  following 
provisions  relating  to  the  Non-Forfeiture  and  Loan  features 
of  this  Policy  shall  become  operative  only  after  payment  of 
premiums  for  two  full  years,  and  no  request,  revocation  or 
change  in  connection  with  such  provisions  shall  become  ef- 
fective unless  duly  made  in  writing  and  filed  at  the  Home  Of- 
fice of  the  Company: 

11  a.  Basis  of  Surrender  Values.  The  cash  surrender  value 
of  this  Policy  at  any  time  prior  to  default  in  pre- 
mium payment  or  within  the  thirty-one  days  of  grace, 
will  be  the  then  reserve  on  the  Policy  and  any  divi- 
dend additions  then  existing,  less  any  indebtedness  to 
the  Company  on  account  thereof,  and  less  also  a  sur- 
render charge  on  the  amount  insured  which  during 
Ithe  fifth  or  any  previous  Policy  year  shall  be  at  the 
rate  of  ten  dollars  per  $1,000  of  insurance  and  which 
thereafter  shall  diminish  annually  at  the  rate  of  one 
dollar  per  $1,000  of  insurance. 

11  &.  Premium  Loans.  Upon  request  of  the  Insured,  to- 
gether with  the  Assigns  if  any,  made  prior  to  default 
in  premium  payment,  the  premium  or  premiums 
thereafter  falling  due,  during  the  time  any  such  re- 
quest shall  remain  unrevoked  and  not  paid  when  or 
before  due,  will  be  charged  as  a  premium  loan  with 
interest  at  the  rate  of  five  per  cent,  per  annum,  pro- 
vided the  then  cash  surrender  value  (as  stated  in  the 
preceding  paragraph  numbered  11  a)  shall  be  sufficient 
to  cover  such  loan.  Any  premium  loan  may  be  re- 
paid at  any  time. 
lie.  Extended  and  Paid-up  Insurance  Options.  Upon  de- 


442       THE  PKINCIPLES  OF  LIFE  INSUKANCE 

fault  in  premium  payment,  unless  the  premium  be 
paid  within  the  thirty-one  days  of  grace,  the  face 
amount  of  the  Policy  and  any  existing  dividend  addi- 
tions, less  any  indebtedness  to  the  Company  on  ac- 
count thereof,  will  be  extended  automatically  as  non- 
participating  term  insurance  for  such  length  of  time 
from,  the  date  of  such  default  as  the  then  cash  sur- 
render value  (as  stated  in  the  preceding  paragraph 
numbered  11  a)  will  provide  at  the  net  single  premium 
rate  for  the  attained  age  of  the  Insured  according  to 
the  American  Experience  Table  of  Mortality  with  in- 
terest at  three  per  cent. 

11  d.  Upon  request  of  the  Insured,  together  with  the  Bene- 
ficiary and  Assigns  if  any,  made  prior  to  default  in 
premium  payment  or  within  the  thirty-one  days  of 
grace  and  including  a  waiver  of  the  automatic  ex- 
tended term  insurance  feature,  participating  paid-up 
insurance  will  be  secured  upon  default  in  premium 
payment,  unless  the  premium  be  paid  within  the 
thirty-one  days  of  grace,  for  such  an  amount  as  the 
then  cash  surrender  value  (as  stated  in  the  preceding 
paragraph  numbered  11  a,  but  exclusive  of  any  in- 
debtedness which  shall  remain  as  a  lien  against  the  pol- 
icy) will  provide  at  the  net  single  premium  rate  for  the 
attained  age  of  the  Insured  according  to  the  American 
Experience  Table  of  Mortality  with  interest  at  three 
per  cent. 

11  e.  Change  from  automatic  extended  term  insurance  to 
paid-up  insurance,  or  vice  versa,  may  be  made  in  ac- 
cordance with  their  -respective  provisions,  if  the  Pol- 
icy be  not  then  in  premium  default  for  more  than 
thirty-one  days. 

11  f.  Cash  Surrender  and  Loan  Options.  Upon  request  ac- 
companied by  a  full  and  valid  surrender  of  this  Pol- 
icy and  all  claims  thereunder,  the  Company  will  pay 
the  then  'cash  surrender  value  thereof,  which  while 
the  Policy  is  in  full  force  including  the  thirty-one 
days  of  grace,  shall  be  as  stated  in  the  preceding  para- 
graph numbered  Ha,  and  subsequent  thereto  shall  be 
the  full  reserve  on  the  form  of  insurance  then  in  force 
less  any  indebtedness  to  the  Company  on  account 
thereof. 

110.     Upon   request   and   the    sole   security   of   this   Policy 


SPECIMEN  LIFE  POLICY 


443 


properly  assigned,  the  Company,  unless  extended  term 
insurance  be  in  force,  will  advance  at  a  rate  of  in- 
terest not  exceeding  six  per  cent,  per  annum,  an 
amount  which  with  the  interest,  and  any  unpaid  pre- 
mium or  premiums,  for  the  then  current  policy  year 
shall  equal,  or  at  the  option  of  the  Insured  be  less 
than,  the  cash  surrender  value  of  the  Policy  and  of 
any  existing  dividend  additions  at  the  end  of  such 
year.  Failure  to  pay  either  loan  or  interest  shall  not 
avoid  the  Policy  unless  the  total  indebtedness  to  the 
Company  on  account  thereof  shall  equal  or  exceed  the 
cash  surrender  value  of  the  Policy  and  any  existing 
dividend  additions,  nor  until  thirty-one  days  after  no- 
tice shall  have  been  mailed  to  the  last  known  address 
of  the  Insured  and  of  any  Assignee. 

11  h.  The  Company  shall  have  the  right  to  defer  payment 
of  the  cash  value, -or  the  making  of  the  loan  (unless 
for  the  purpose  of  paying  renewal  premiums  on  poli- 
cies in  this  Company),  for  a  period  not  exceeding 
ninety  days. 

TABLE  OF  LOAN  AND  SUEEENDEE  VALUES 

This  Table  is  based  upon  a  policy  of  $1,000  free  from  in- 
debtedness and  without  dividend  additions.  The  Values  stated 
will  apply  pro  rata  to  the  amount  of  this  Policy  and  due  al- 
lowance will  be  made  for  any  dividend  additions  continued  in 
force  and  also  for  any  portion  of  a  year's  premium  paid  over 
and  above  the  premiums  for  the  full  number  of  years  indi- 
cated. Indebtedness  will  be  adjusted  as  stated  in  the  Policy. 


AT  END  OF 
POLICY 
YEAR 

LOAN  OR 
CASH  VALUE 

PAID-UP 
INSURANCE 

EXTENDED  TERM 
INSURANCE 

YEARS 

DAYS 

2 

$  16.13 

$  37 

1 

297 

3 

29.76 

67 

3 

122 

4 

43.77 

97 

4 

3i3 

5 

58.16 

127 

6 

132 

6 

73.94 

158 

7 

332 

7 

90.11 

189 

9 

122 

8 

106.68 

220 

10 

220 

9 

123.65 

250 

11 

258 

10 

141.01 

279 

12 

236 

444       THE  PRINCIPLES  OF  LIFE  INSURANCE 


AT  END  OF 
POLICY 
YEAB 

LOAN  OB 
CASH  VALUE 

PAID-UP 
INSUBANCE 

EXTENDED  TEBM 
INSUBANCE 

YEARS 

DAYS 

11 

158.76 

309 

13 

158 

12 

176.87 

337 

14 

31 

13 

195.35 

366 

14 

222 

14 

214.16 

393 

15 

10 

15 

233.28 

420 

15 

127 

16 

251.68 

445 

15 

195 

17 

270.34 

469 

15 

238 

18 

289.22 

492 

15 

258 

19 

308.32 

515 

15 

260 

20 

327.58 

537 

15 

245 

21 

347.00 

559 

15 

214 

22 

366.52 

579 

15 

171 

The  Values  in  the  above  Table  after  the  fourteenth  policy 
year  are  equal  to  the  full  reserve  according  to  the  American 
Experience  Table  of  Mortality  with  interest  at  three  per  cent. 
The  basis  upon  which  the  Table  is  constructed  will  apply  if 
this  Policy  be  continued  in  force  beyond  the  twenty-second 
year. 


PROVISIONS  RELATING  TO  SETTLEMENT 

(in  lieu  of  payment  in  one  sum) 
WHEN  THIS  POLICY  BECOMES  PAYABLE 

The  Insured  shall  have  the  right,  with  the  privilege  of  revo- 
cation and  change,  to  elect,  in  lieu  of  payment  in  one  sum, 
either  of  Options  "A",  "  B ",  or  "  C ",  or  that  the  amount 
payable  be  distributed  under  two  or  more  of  said  options;  the 
Beneficiary  or  Beneficiaries  when  this  policy  becomes  payable 
shall  have  the  same  fight  and  privilege  if  no  such  election  ef- 
fected by  the  Insured  shall  then  be  in  force;  the  Beneficiary 
or  Beneficiaries  if  of  lawful  age  when  this  Policy  becomes 
payable,  shall  also  (subject  to  the  rights  of  any  assignee,  and 
if  there  then  be  living  no  Contingent  Beneficiary  designated 
by  the  Insured)  have  the  right,  with  the  privilege  of  revocation 
and  change,  to  designate  a  Contingent  Beneficiary  or  Bene- 
ficiaries whose  interest  shall  be  as  expressed  in,  or  endorsed  by 
the  Company  on,  this  Policy;  provided,  however  — 


SPECIMEN  LIFE  POLICY  445 

1st.  Amount  ^Payable.  The  amount  payable  must  equal 
or  exceed  $1,000  for  each  option  elected. 

2nd.  Endorsement.  No  election,  direction,  designation, 
revocation  or  change  shall  be  effective  unless  duly  made  in 
writing  and  filed  at  the  Home  Office  of  the  Company  (ac- 
companied by  the  Policy  for  suitable  endorsement)  prior  to 
or  at  the  time  this  Policy  shall  become  payable. 

3rd.  Deceased  Beneficiary.  If  there  be  more  than  one 
Beneficiary,  the  interest  of  any  deceased  Beneficiary  shall, 
upon  satisfactory  proof  of  such  decease,  pass  to  the  survivor 
or  survivors  unless  otherwise  directed  by  the  Insured  and 
endorsed  by  the  Company  on  this  Policy;  except  that  under 
Option  "  C  "  only  so  many  of  the  stipulated  installments,  if 
any,  as  then  remain  unpaid,  shall  so  pass. 

4th.  Rights  of  Contingent  Beneficiary.  Unless  otherwise 
directed  by  the  designator  and  so  endorsed  by  the  Company 
on  this  Policy,  the  Contingent  Beneficiary  or  Beneficiaries, 
if  any,  shall,  upon  satisfactory  proof  of  the  death  of  the 
last  surviving  Beneficiary,  succeed  to  all  the  interest,  rights 
and  privileges  then  possessed  by  such  Beneficiary;  except 
that  under  Option  "  C "  the  interest  of  any  Contingent 
Beneficiary  shall  be  limited  to  such  of  the  stipulated  install- 
ments, if  any,  as  then  remain  unpaid. 

5th.  Last  Surviving  Beneficiary  or  Contingent  Bene- 
ficiary. At  the  death  of  the  last  surviving  Beneficiary  if 
there  be  no  Contingent  Beneficiary  then  living,  or  at  the 
death  of  the  last  surviving  Contingent  Beneficiary  occurring 
subsequently  thereto,  the  amount  retained  by  the  Company 
under  Option  "  A "  will  be  paid  to  the  executors,  adminis- 
trators or  assigns  of  such  last  surviving  Beneficiary  or  Con- 
tingent Beneficiary  upon  due  surrender  of  this  Policy;  under 
the  same  conditions,  any  of  the  installments  under  Option 
"  B ",  or  any  of  the  stipulated  installments  under  Option 
"  C ",  then  remaining  unpaid,  will  be  commuted  upon  the 
basis  of  three  per  cent,  compound  interest  and  paid  in  one 
sum  in  like  manner. 

OPTION  A 

Annuity  Extension.  To  have  the  whole  or  any  part  not  less 
than  $1,000  of  the  proceeds  of  this  Policy  at  the  death,  of  the 
Insured  retained  by  the  Company  until  the  death  of  the  last 
surviving  Beneficiary  or  Contingent  Beneficiary,  the  Company 
in  the  meantime  to  pay  an  annuity  equal  to  three  per  cent,  of 


446       THE  PRINCIPLES  OF  LIFE  INSURANCE 


the  amount,  so  retained,  the  first  annuity  being  payable  one 
year  after  the  death  of  the  Insured. 

Commutation.  At  the  time  any  annuity  payment  becomes 
due  the  Beneficiary,  if  of  lawful  age,  provided  the  Company 
has  not  been  specifically  directed  to  the  contrary  by  the  In- 
sured, shall  have  the  right,  upon  due  surrender  of  this  Policy, 
to  withdraw  the  amount  so  retained  by  the  Company,  in  addi- 
tion to  such  annuity  payment,  and  if  said  amount  be  so  with- 
drawn the  annuity  payments  shall  cease. 

OPTION  B 

Limited  Installments.  To  have  the  whole  or  any  part  not 
less  than  $1,000  of  the  proceeds  of  this  Policy  at  the  death 
of  the  Insured  paid  in  a  specified  number  of  annual  install- 
ments as  per  the  first  Table  below,  which  shall  apply  pro  rata 
per  $1,000  of  the  amount  to  be  so  paid,  the  first  installment 
being  payable  immediately. 

Change.  The  number  of  the  installments  may  be  changed  by 
the  insured  at  any  time  prior  to  the  payment  of  the  first  in- 
stallment. 

Commutation.  The  installments  remaining  unpaid  will  be 
commuted  upon  the  basis  of  three  per  cent,  compound  inter- 
est, and  paid  in  one  sum,  at  any  time  when  an  installment  is 
due,  upon  written  request  of  the  Beneficiary  or  Beneficiaries, 
if  of  lawful  age,  and  due  surrender  of  this  Policy,  provided  the 
Company  has  not  been  specifically  directed  to  the  contrary  by 
the  Insured. 

LIMITED   INSTALLMENT   TABLE 


Number  of  Installments. 

25 

20 

19 

18 

17 

Amount  of    each 

$55  75 

$65.25 

$67.78 

$70,59 

$73.74 

Number  of  Installments. 

16 

15* 

14 

13 

12 

Amount  of    each 

$77  29 

$81  32 

$85.94 

$91.29 

$97.53 

Number  of  Installments. 

11 

10 

9 

8 

7 

Amount  of    each 

$104.92 

$113.81 

$124.69 

$138.30 

$155,83 

Number  of  Installments. 

6 

5 

4 

3 

2 

Amount    of    each 

$179.22 

$211.99 

$261.19 

$343.23 

$507.39 

*  ILLUSTRATION. —  If  payment  is  to  be  made  by  15  installments, 
the  amount  of  each  Installment  will  be  $81.32  for  each  $1,000. 


SPECIMEN  LIFE  POLICY 


447 


OPTION  C 

Continuous  Installments.  To  have  the  whole  or  any  part 
not  less  than  $1,000  of  the  proceeds  of  this  Policy  at  the  death 
of  the  Insured  converted  into  an  immediate  life  annuity  to 
the  Beneficiary  at  the  then  published  rate  of  the  Company; 
or,  paid  in  either  10,  15,  20  or  25  stipulated  annual  installments 
of  an  amount  corresponding  in  the  Table  below  to  the  num- 
ber of  installments  selected  and  to  the  age  of  the  Beneficiary 
at  the  date  of  the  death  of  the  Insured,  provided  that  if  the 
Beneficiary  shall  survive  to  receive  the  number  of  installments 
selected,  then  similar  installments  shall  be  continued  through- 
out the  lifetime  of  the  Beneficiary.  The  Table  shall  apply  pro 
rata  per  $1,000  of  the  amount  to  be  so  paid,  the  first  install- 
ment being  payable  immediately. 

Pro-raid  Share.  If  there  be  more  than  one  Beneficiary  the 
amount  to  be  so  paid,  unless  otherwise  directed  by  the  Insured 
and  endorsed  by  the  Company  on  this  Policy,  shall  be  con- 
sidered as  divided  into  equal  parts  and  the  amount  of  each 
Beneficiary's  annual  installment  shall  be  determined  in  ac- 
cordance with  the  Table  below  for  the  age  attained. 

CONTINUOUS   INSTALLMENT   TABLE 


AGE  OF 
BENE- 
FICIARY 

NUMBER  OF  INSTALLMENTS  STIPULATED 

10 

15 

20 

25 

10 

$42.06 

$41.24 

$40.36 

$39.48 

11 

42.27 

41.43 

40.54 

39.64 

12 

42.48 

41.63 

40.72 

39.81 

13 

42.71 

41.84 

40.91    . 

39.97 

14 

42.95 

42.05 

41.10 

40.14 

15 

43.19 

42.28 

41.31 

40.32 

16 

43.44 

42.51 

41.51 

40.50 

17 

43.70 

42.74 

41.72 

40.70 

18 

43.94 

42.97 

41.93 

40.88 

19 

44.19 

43.20 

42.14 

41.07 

20 

44.44 

43.43 

42.35 

41.27 

21 

44.71 

43.68 

42.58 

41.48 

22 

44.99 

43.94 

42.81 

41.68 

23 

45.28 

44.20 

43.05 

41.89 

24 

45.59 

44.48 

43.30 

42.12 

25 

45.89 

44.76 

43.56 

42.35 

26 

46.23 

45.06 

43.83 

42.61 

448        THE  PRINCIPLES  OF  TIFE  INSURANCE 


AGE  OF 
BENE- 
FICIARY 

NUMBER  OF  INSTALLMENTS  STIPULATED 

10 

15 

20 

25 

27 

46.56 

45.37 

44.11 

42.86 

28 

46.92 

45.69 

44.40 

43.12 

29 

47.28 

46.03 

44.70 

43.38 

30 

47.65 

46.36 

45.02 

43.67 

31 

48.04 

46.73 

45.34 

43.96 

32 

48.45 

47.10 

45.68 

44.27 

33 

48.87 

47.48 

46.03 

44.56 

34 

49.29 

47.88 

46.39 

44.88 

35 

49.75 

48.30 

46.77 

45.21 

36 

50.22 

48.73 

47.16 

45.56 

37 

50.70 

49.18 

47.56 

45.89 

38 

51.23 

49.66 

47.99 

46.27 

39 

51.78 

50.16 

48.43 

46.64 

40 

52.36 

50.69 

48.90 

47.01 

41 

52.98 

51.25 

49.38 

47.42 

42 

53.62 

51.83 

49.88 

47.82 

43 

54.32 

52.45 

50.40 

48.22 

44 

55.04 

53.10 

50.94 

48.64 

45 

55.83 

53.78 

51.50 

49.04 

46 

56.64 

54.49 

52.08 

49.46 

47 

57.50 

55.23 

52.67 

49.88 

48 

58.42 

56.01 

53.27 

50.30 

49 

59.39 

56.82 

53.89 

50.68 

50 

60.42 

67.66 

54.51 

51.10 

51 

61.50 

58.54 

55.14 

51.47 

52 

62.63 

59.44 

55.76 

51.84 

53 

63.82 

60.36 

56.38 

52.19 

54 

65.07 

61.31 

56.99 

52.52 

55 

66.37 

62.28 

57.60 

52.83 

56 

67.75 

63.26 

58.18 

53.11 

57 

69.18 

64.25 

58.75 

53.39 

58 

70.67 

65.24 

59.29 

53.65 

59 

72.20 

66.23 

59.81 

53.88 

60 

73.79 

67.21 

60.30 

54.08 

61 

75.41 

68.17 

60.76 

54.26 

62 

77.07 

69.10 

61.20 

54.44 

63 

78.75 

70.00 

61.60 

54.60 

64 

80.44 

70.87 

61.97 

54.74 

65 

82.11 

71.68 

62.32 

54.86 

66 

83.78 

72.46 

62.65 

Age  66 

67 

85,39 

73.19 

62.97 

and  over 

SPECIMEN  LIFE  POLICY 


449 


AGE  OF 
BENE- 
FICIARY 

NUMBER  OF  INSTALLMENTS  STIPULATED 

10 

15 

20 

25 

68 

86.99 

73.88 

63.28 

same 

69 

88.50 

74.52 

63.58 

as  65. 

70 

89.96 

75.11 

63.87 

71 

91.36 

75.65 

Age  71 

72 

92.69 

76.14 

and  over 

73 

93.96 

76.57 

same 

74 

95.17 

76.94 

as  70. 

75 

96.30 

77.24 

76 

97.35 

Age  76 

77 

98.32 

and  over 

78 

99.22 

same 

79 

100.05 

as  75. 

80 

100.82 

Age  81 
and  over 

same 

as  80. 

Participation.  For  ages  of  Beneficiaries  under  10  years  the 
installments  will  be  the  same  as  for  age  10. 

All  payments  under  Options  "  A "  and  "  B  ",  and  the  stipu- 
lated payments  under  Option  "  C  ",  will  be  increased  by  such 
annual  dividends  as  may  be  apportioned  by  the  Company. 


FORM  OF  APPLICATION 

PART  I.      APPLICATION  TO  THE  LIFE  INSURANCE  COMPANY. 

1.  Part  1  of  application  of  (Name  in  full)  for  Life  Insur- 
ance, 

Residence 
County  of 
State  of 
P.  O.  Address 

2.  Full  name  of  the  person,  if  any,  to  be  designated  as  bene- 
ficiary. 

Relationship  to  yourself 

3.  Do  you  reserve  the  right  to  change  such  beneficiary  ? 

4.  Your  Occupation  or  Employment.     (If  more  than  one, 
state  all) 


450        THE  PKINCIPLES  OF  LIFE' INSURANCE 

5.  Place  and  date  of  your  Birth? 

6.  Have  you  ever  applied  for  insurance  in  this  Company? 
If  so,  what  is  the  number  and  amount  of  each  policy  issued? 

7.  Is  your  life  now  insured  in  any  other  company?     If  so% 
in  what  companies  and  for  what  amount? 

8.  Have  you  ever  applied  to  any  company  or  society  for  in- 
surance,  without    receiving   a   policy   of   the   exact   kind    and 
amount  applied  for  ? 

9.  Is  any  negotiation  for  other  insurance  now  pending  or 
contemplated  ? 

10.  Insurance  —  Amount,  $ 
Plan 

Premium  payable  (Annually,  Semi-Annually  or  Quarterly) 

11.  Have  you  paid  the  Agent  taking  this  application  the 
amount  of  such  premium? 

It  is  understood  and  agreed  (1)  that  if  the  amount  of  the 
premium  on  the  insurance  herein  applied  for  is  not  paid  at 
the  time  of  making  this  application  there  shall  be  no  liability 
on  the  part  of  the  said  Company  under  this  application  unless 
nor  until  a  policy  shall  be  issued  and  delivered  to  me  and 
the  first  premium  thereon  actually  paid  during  my  lifetime; 
and  (2)  that  if  the  amount  of  such  premium  is  paid  to  the 
said  Company's  agent  at  the  time  of  making  this  application 
the  insurance  (subject  to  the  provisions  of  the  said  Company's 
regular  form  of  policy  for  the  plan  applied  for)  shall  be  ef- 
fective from  the  date  of  my  medical  examination  therefor  and 
such  a  policy  shall  be  issued  and  delivered  to  me  or  my  legal 
representatives,  provided  the  said  Company  in  its  judgment 
shall  be  satisfied  as  to  my  insurability,  on  the  plan  applied  for, 
on  the  date  of  such  medical  examination;  and  (3)  that  if  said 
Company  shall  not  be  so  satisfied  the  amount  of  the  premium 
paid  shall  be  returned. 


Name  in  full  of  the  Beneficiary   (may  be  signed  by  applicant). 

Per  Initials  of  Applicant. 


Signature  in  full  of  the  person  applying  for  insurance  on  his  life. 

Dated  at-+-     -this— day  of 19— 

Actual  date  of   signature   to   application. 


SPECIMEN  LIFE  POLICY  451 

PART    II.      DECLARATIONS    MADE    TO    THE    MEDICAL    EXAMINER    OF 
THE  -     -  INSURANCE  CO. 

N.  B. —  Answers  to  the  following  questions  must  be  elicited 
and  recorded  by  a  regularly  appointed  Examiner  of  the  Com- 
pany, with  no  one  present  but  the  Applicant  and  Examiner. 

1.  A.  Part  II  of  Application  of  -    —  for  Life  Insurance  which 

forms  part  of  the  accompanying  application  signed  by 
the  undersigned  applicant  and  marked  Part  I.  Said 
application  is  to  be  hereto  annexed. 

B.  Race  (white  or  black?) 

c.  Age  last  birthday? 

D.  Are  you  married,  single  or  a  widower? 

2.  A.  Where  do  you  reside  winter  and  summer? 

B.  Where  have  you  resided  during  the  past  ten  years? 

c.  Have  you  ever  changed  your  residence  or  tried  a  change 
of  climate  on  account  of  your  health,  or  been  advised 
to  do  so  by  a  physician?  If  so,  give  particulars. 

D.  Do  you  contemplate,  for  any  reason,  either  a  temporary 
or  permanent  change  of  residence,  or  a  trip  beyond  the 
limits  of  the  temperate  zone?  If  so,  give  particulars. 

3.  A.  How  much  insurance  are  you  applying  for  in  this;  appli- 

cation ? 

B.  Has  any  proposal  or  application  to  insure  your  life  ever 

been  made  to  any  Company,  Society,  Association  or 
Agent  upon  which  a  policy  has  not  been  issued  as  ap- 
plied for? 

C.  Has  any  physician  ever  given  an  opinion  that  you  were 

not  safely  insurable? 

D.  When  and  for  what  Company  were  you  last  examined  for 

life  insurance? 

4.  A.  What  is  your  present  occupation  and  how  long  have  you 

been  so  engaged? 

B.  Have  you  any  other  occupation  or  business? 
c.  What  have  been  your  occupations  during  the  past  ten 

years  ? 

D.  Do   you   contemplate   a   change   in   occupation?    If   so, 

what? 

E.  Are  you  now,  or  have  you  ever  been,  engaged,  either  di- 

rectly or  indirectly,  in  the  sale  or  manufacture  of  malt 
or  other  spirituous  beverages? 

5.  A.  What  is  your  weight  in  ordinary  clothes? 
B.  What  is  your  height  in  shoes? 


452       THE  PKINCIPLES  OF  LIFE  INSURANCE 


0.  To  what  extent,  if  any,  has  your  weight  increased  or  di- 
minished during  the  past  year,  and  from  what  cause? 

D.  If  heavy  or  light  in  weight,  state  whether  this  is  a  fam- 

ily or  individual  characteristic. 

E.  Which  parent  do  you  most  resemble  physically? 

6.  A.  If  you  use  wine,  spirits,  malt  liquors  or  other  alcoholic 
beverages,  state  kind  used  and  how  much  in  any  one 
day  at  the  most. 

B.  How  frequently  do  you  use  the  amount  stated? 

c.  If  you  use  any  of  them  daily,  weekly  or  monthly,  state 
kind  and  average  for  the  past  two  years. 

D.  Have  you  used  any  of  them  to  the  extent  of  intoxica- 

tion during  the  past  ten  years?    //  so  give  circum- 
stances and  dates. 

E.  Have  you  ever  taken  treatment  for  alcoholic  or  drug 

habit? 

F.  If  a  total  abstainer,  how  long  have  you  been  so  ? 

G.  In  what  form  and  to  what  extent  do  you  use  tobacco  ? 
H.  Do  you  now  use  or  have  you  ever  used  opium,  chloral, 

cocaine  or  any  other  narcotic  drug? 


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Brothers. 

No.     dead  

No.   living  
Sisters. 

No.  dead  

Father's  Father. 

Father's   Mother. 

Mother's   Father. 

Mother's    Mother. 

8.  Have  either  of  your  parents,  or  any  of  your  uncles,  aunts, 
brothers  or  sisters  been  afflicted  with  Consumption?  —  or 


SPECIMEN  LIFE  POLICY  453 

Cancer,  Insanity,  Epilepsy,  Gout,  Diabetes  or  Kheuma- 
tism? 

9.  Have  you  been  closely  associated  within  the  past  two  years, 
either  at  home  or  in  business  life,  with  a  consumptive? 

10.  A.  When  were  you  last  confined  to  the  house  by  illness? 

How  long?     What  nature? 

B.  When  did  you  last  consult  a  physician,  and  for  what? 
c.  Have  you  fully  recovered,   and  are  you  now  in  good 

health? 

D.  Give  name  and  address  of  the  physician  who  attended 

you. 

E.  Give  name  and  address  of  your  usual  medical  attendant. 

F.  Are  you  willing  your  physician  be  consulted  respecting 

your  health? 

11.  Have  you  had  any  illness,  disease  or  accident  during  past 

ten  years  not  mentioned  above?  Give  details.  Illness, 
disease  or  accident.  Date.  Duration.  Severity.  Re- 
sults. Name  of  medical  attendant. 

12.  Have  you  had  since  childhood  any  of  the  following  diseases 

or  disorders? 

Malarial  or  other  Fevers? 
Smallpox  or  Yarioloid? 
Apoplexy  or  Paralysis  ? 

Mental  Derangement  or  any  Nervous  Disease? 
Headaches,  severe,  protracted  or  frequent? 
Indigestion,   Appendicitis  or   any  Disease  of   Stomach  or 

Bowels? 

Persistent  or  frequent  Cough  or  Hoarseness? 
Spitting  or  raising  of  blood? 
Asthma  or  shortness  of  breath? 
Pleurisy,   Bronchitis,   Pneumonia,   or   any   Chest   or  Lung 

Disease? 

Vertigo,  Dizziness  or  Unconsciousness  ? 
Fits,  Epilepsy,  Delirium  Tremens  or  Convulsions  of  any 

kind? 

Impairment  of  Eyesight  or  Hearing? 
Discharge  from  Ear  or  any  other  Chronic  Discharges? 
Piles,  Fistula  or  any  other  Disease  of  the  Rectum? 
Chronic  or  frequent  Diarrhoea  or  Dysentery? 
Affection  of  the  Liver  or  Spleen? 
Jaundice  or  Dropsy? 
Liver  or  Kidney  Colic  or  Stone? 
Gravel,  Bladder  or  Kidney  Disease  ? 


454       THE  PRINCIPLES  OF  LIFE  INSURANCE 

Painful,  frequent  or  difficult  Urination? 
Sunstroke  or  Fainting  Spells? 
Palpitation  or  any  Disease  of  the  Heart? 
Enlarged  Veins,  Cancer,  Tumors,  or  Ulcers,  of  any  kind? 
Hydrocele  or  any  disease  of  the  Testicles  or  Prostate  gland  ? 
Neuralgia  or  Sciatica  ? 
Skin  Disease,  Gout  or  Goiter? 
Syphilis,  or  Stricture? 

:  State  how  frequently,  the  date,  character  and  duration  of 
each,  and  its  effect  upon  your  health? 

13.  A.  Are  you  ruptured?    B.  If  so,  do  you  wear  a  truss  con- 

stantly except  when  in  bed? 

14.  A.  Have  you  ever  had  Inflammatory  or  Articular  Rheuma- 

tism? B.  If  so,  state  the  number  of  attacks,  c.  The 
duration  of  each  attack.  D.  In  what  years,  and  parts 
affected  ? 

15.  Have  you  ever  applied  for  a  Pension?     If  so,  what  was  the 

disability? 

16.  Have  you  undergone  any  Surgical  Operation,  or  ever  had 

disease  of  bones  of  joints,  spinal  curvature,  or  any  bodily 
malformation  ? 

17.  Has  a  Physician  at  any  time  expressed  an  opinion  that  your 

urine  contained  either  sugar,  albumin  or  casts  ? 

18.  Have  you  had  since  childhood  any  chronic  or  constitutional 

disease  or  severe  injury  not  fully  set  forth  above? 
I  certify  that  my  answers  to  the  foregoing  questions   and 
statements  are  correctly  recorded. 


Signature    of    the    Applicant.      (Signed    in   presence    of    Medical   Ex- 
aminer.) 

Signed  by  applicant  in  my  presence. 
,M.D. 

Medical  Examiner. 


APPENDIX  III 

SPECIMEN  COPY  OF  AN  ADULT  WHOLE-LIFE 
INDUSTKIAL  POLICY 

INSURANCE  COMPANY 

In  Consideration  of  the  representations  and  agreements  in 
the  application  herefor,  which  is  copied  hereon  and  made  a  part 
hereof,  and  of  the  premium  stipulated  herein,  to  be  paid  on  or 
before  each  Wednesday,  grants  this  insurance  with  the  priv- 
ileges and  benefits  and  subject  to  the  conditions  and  provisions 
on  this  and  the  three  following  pages,  which  are  made  a  part 
of  this  contract. 

Policy  number  

Date  April  28  1915. 

Weekly  Premium  25  Cents 

Age  next  birthday  35  Years 

Name  of  Insured  John  Doe 

Name  of  Beneficiary  Jane  Doe 

Relationship  to  Insured  Wife 

Full  Policy  Amount  840.  Dollars 

During  the  first  six  MONTHS  from  the  date  hereof,  the  sum 
insured  hereunder  will  be  ONE-HALF  only  of  the  full  policy 
amount  in  case  of  death  from  any  cause  other  than  ACCIDENT. 
In  case  of  death  from  ACCIDENT  during  the  first  six  MONTHS  and 
THEREAFTER  in  case  of  death  from  any  cause,  the  sum  insured 
will  be  the  FULL  policy  amount. 

On  satisfactory  proof  of  the  death  of  the  Insured,  made  in 
the  manner  and  to  the  extent  required  herein  and  upon  sur- 
render of  the  Policy  and  Premium  Receipt  Books,  the  Company 
will  pay  the  amount  due  hereunder.  The  Company  may  make 
payment  either  to  the  beneficiary  above  named,  if  living,  or  to 
such  other  living  beneficiary  as  may  be  duly  and  finally  desig- 
nated, and  recognized  by  endorsement  hereon,  or  to  the  Exec- 
utor or  Administrator  of  said  Insured  or  to  any  relative  by 
blood  or  connection  by  marriage,  or  to  any  person  appearing 
to  the  Company  to  be  equitably  entitled  thereto  by  reason  of 
having  incurred  expense  in  any  way  on  behalf  of  the  Insured 

455 


456       THE  PKINCIPLES  OF  LIFE  INSURANCE 

for  burial  or  for  any  other  purpose;  and  the  receipt  of  any 
such  payee  shall  be  conclusive  evidence  that  payment  has  been 
made  to  the  person  or  persons  entitled  thereto  and  that  all 
claims  under  this  Policy  have  been  fully  satisfied. 

This  Policy  shall  not  take  effect  unless  upon  its  date  the 
Insured  shall  be  alive  and  in  good  health  and  the.  premium  duly 
paid. 

In  Witness  Whereof,  the  said  Insurance  Company  "has, 

by  its  President  and  Secretary,  executed  and  delivered  this  con- 
tract on  the  date  herein  above  set  forth. 

,  President. 

,  Secretary. 

Limitation  of  Premium  Payments.  If  the  premiums  shall 
be  duly  paid  until  the  anniversary  of  the  date  of  this  policy 
next  following  the  Insured's  seventy-fourth  birthday,  it  will  be 
continued  in  force  thereafter  without  the  payment  of  further 
premiums. 

Change  of  Beneficiary.  With  the  consent  of  the  Company, 
the  Insured,  if  of  lawful  age,  may  from  time  to  time  change 
the  beneficiary  by  request  to  the  Home  Office  upon  the  Com- 
pany's prescribed  form  accompanied  by  this  policy,  such  change 
to  take  effect  only  upon  endorsement  hereon  by  the  Company. 

Incontestability.  After  this  policy  shall  have  been  in  force 
for  two  full  years,  it  shall  be  incontestable  except  for  non-pay- 
ment of  premiums,  or  for  assignment  or  pledge,  or  for  failure 
to  have  the  policy  endorsed  in  case  of  previously  issued  insur- 
ance as  herein  provided,  but  it  shall  nevertheless  be  subject  to 
adjustment  for  error  in  age.  In  case  of  error  in  age,  no 
greater  sum  will  be  paid  hereunder  than  the  premiums  paid 
would  have  purchased  for  the  true  age  according  to  the  table 
of  rates  and  benefits  on  which  this  policy  is  based.  No  suit 
shall  be  maintained  under  this  policy  unless  commenced  within 
six  years  from  the  time  when  cause  of  action  accrues. 

Distribution  of  Surplus.  Beginning  not  later  than  the  end 
of  the  fifth  year  from  its  date,  if  all  the  premiums  then  due 
shall  have  been  paid,  this  policy  shall  annually  participate  in 
such  distribution  of  the  surplus  as  the  Company  may  appor- 
tion. Dividends  will  be  applied  in  payment  of  premiums  unless 
the  holder  elects  to  receive  them  in  cash. 

Reinstatement.  At  any  time  within  one  year  from  default 
in  payment  of  premiums,  if  the  cash  surrender  value  has  not 


SPECIMEN  INDUSTRIAL  POLICY 


457 


been  paid  or  the  extension  term  expired,  this  policy  may  be 
reinstated  upon  production  of  evidence  of  insurability  satis- 
factory to  the  Company  and  approved  at  its  Home  Office,  and 
upon  payment  of  arrears  of  premiums  and  payment  or  rein- 
statement of  any  indebtedness  hereon  or  secured  hereby. 

Claim  Concession.  This  policy  will  be  paid  subject  to  its 
conditions  if  the  Insured  die  while  premiums  are  in  arrears 
not  more  than  four  weeks,  but  neither  this  concession  nor  the 
acceptance  of  any  overdue  premium  shall  create  an  obligation 
on  the  part  of  the  Company  to  receive  premiums  which  are  in 
arrears,  nor  shall  it  be  a  waiver  of  their  payment  on  Wednesday 
of  each  week  in  advance. 

NON-FORFEITURE  BENEFITS.  —  Automatic  Extended 
Term  Insurance  After  Three  Years.  After  premiums  shall  have 
been  paid  on  this  policy  for  three  full  years,  then,  in  case  of 
failure  to  pay  any  subsequent  premium,  the  policy,  without 
any  further  stipulation  or  act,  will  be  binding  on  the  Company 
for  its  full  amount  as  EXTENDED  TERM  INSURANCE,  commencing 
from  the  date  to  which  the  premiums  shall  have  been  paid,  the 
length  of  the  term  to  be  determined  by  the  period  of  premium 
payments,  according  to  Table  A.  The  insurance  will  wholly 
cease  and  expire  at  the  end  of  the  term  of  extension  to  which 
the  policy  is  entitled  under  its  conditions. 

TABLE  A. —  The  periods  of  Extended  Insurance  in  this  table  are  the 
same  for  any  amount  of  weekly  premium  paid. 


AGE  AT 
ISSUE 

END  OF 
3 
YEARS 

END  OF 
4 
YEARS 

END  OF 
5 
YEARS 

END  OF 
6 
YEARS 

END  OF 

7 
YEARS 

END  OF 

YEARS 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

26 
27 
28 
29 
30 
31 
32 
33 
34 
35 

0 

0 
0 
0 
0 
0 
0 

1 
1 

1 

32 
34 
36 
38 
42 
46 
51 
5 
10 
16 

1 
1 
1 
1 
1 
1 
2 
2 
2 
2 

30 
31 
33 
37 
41 
47 
1 
8 
14 
20 

2 
2 
2 
2 
2 
2 
3 
3 
3 
3 

26 
28 
32 
36 
42 
48 
3 
10 
17 
23 

3 
3 
3 
3 
3 
3 
4 
4 
4 
4 

23 
26 
31 
36 
43 
50 
5 
12 
19 
25 

4 

4 
4 
4 
4 

4 
5 
5 
5 
5 

21 
25 
30 
36 
43 
50 
5 
12 
18 
24 

5 

5 
5 
5 
5 
5 
6 
6 
6 
6 

19 
24 
29 
35 
42 
49 
3 
9 
15 
20 

AGE  AT 
ISSUE 

END  OF 
9 
YEARS 

END  OF 
10 
YEARS 

END  OF 
11 

YEARS 

END  OF 
12 
YEARS 

END  OF 
13 
YEARS 

END  OF 
14 

YEARS 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

•      26 
27 
28 
29 

6 
6 
6 
6 

17 
22 
27 
33 

7 
7 
7 
7 

13 
18 
23 
28 

8 
8 
8 
8 

8 
12 
17 
21 

9 
9 
9 
9 

1 
4 
8 
11 

9 
9 
9 
9 

43 
45 
47 
49 

10 
10 
10 
10 

30 
31 
31 
32 

458       THE  PRINCIPLES  OF  LIFE  INSURANCE 


AGE  AT 
ISSUE 

END  OF 
9 
YEARS 

END  OF 
10 
YEARS  ' 

END  OF 
11 
YEARS 

END  OF 
12 
YEARS 

END  OF 
13 
YEARS 

END  OK 
14 
YEARS 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

30 
31 
32 
33 
34 
35 

6 

6 
6 
7 
7 

7 

39 
45 
51 
4 
9 
12 

7 
7 
7 
7 
7 
8 

34 

39 
44 

48 
51 

1 

8 
8 
8 
8 
8 
8 

25 

29 
33 
35 
37 
37 

9 
9. 
9 

9 
9 
9' 

14 
16 
18 
19 
19 
18 

9 

10 
10 
9 
9 
9 

51 
0 
0 
51 
50 
47 

10 
10 
10 
10 
10 
10 

32 
31 
30 
27 
24 
20 

AGE  AT 

ISSUE 

END  OF 
15 
YEARS 

END  OF 
16 
YEARS 

END  OF 
17 
YEARS 

END  OF 
18 
YEARS 

END  OF 
19 
YEARS 

END  OF 
20 
YEAKS 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrs 

Wks 

Yrfc 

Wks 

26 
27 
28 
29 
30 
31 
32 
33 
34 
35 

11 
11 
11 
11 
11 
11 
11 
11 
10 
10 

14 
13 
12 
11 
9 
7 
4 
0 
47 
41 

11 
11 
11 
11 
11 
11 
11 
11 
11 
11 

46 
43 
41 
38 
35 
31 
26 
21 
14 
7 

12 
12 
12 
12 
12 
11 
11 
11 
11 
11 

22 
18 
14 
10 
5 
51 
45 
38 
30 
22 

12 
12 
12 
12 
12 
12 
12 
12 
11 
11 

47 
42 
36 
30 
23 
16 
9 
0 
43 
34 

13 
13 
13 
12 
12 
12 
12 
12 
12 
11 

16 
10 
2 
47 
39 
31 
22 
12 
2 
43 

13 
13 
13 
13 
12 
12 
12 
12 
12 
11 

84 

26 
18 
9 
51 
42 
32 
21 
10 
50 

Alternative  Options  of  Paid-up  Policy  or  Cash  Surrender 
Value  After  Five  Years.  After  premiums  shall  have  been  paid 
on  this  policy  for  five  full  years,  then,  in  case  of  failure  to  pay 
any  subsequent  premium,  if  the  holder  hereof,  instead  of  having 
the  policy  continued  as  extended  insurance  as  above  provided, 
shall  elect  in  place  thereof  to  avail  himself  of  either  one  of  the 
following  options,  and  shall  signify  his  preference  by  writing 
filed  with  the  Company  at  its  Home  Office  while  the  extended 
insurance  is  in  force  and  not  later  than  thirteen  weeks  from  the 
date  to  which  the  premiums  shall  have  been  paid,  the  Company 
will,  upon  surrender  of  the  policy, — 

OPTION  1  —  Issue  in  exchange  therefor  a  PAID-UP  POLICY 
according  to  Table  B,  payable  at  the  same  time  and  on  the  same 
conditions  as  this  policy. 

TABLE  B. —  The  amounts  in  this  table  are  based  on  a  weekly  premium  of  five 
cents.  If  the  weekly  premium  on  this  policy  is  ten  cents,  the  Paid-up  Value  will 
be  twice  the  amount  stated  in  this  table ;  if  fifteen  cents,  three  times,  and  so  on. 


AGE 

AT 

ISSUE 

END  OF 
5 
YEARS 

END  OF 
6 
YEARS 

END  OF 
7 
YEARS 

END  OF 
8 
YEARS 

END  OF 
9 
YEARS 

END  OF 
10 
YEARS 

END  OF 
11 
YEARS 

END  OF 
12 
YEARS 

26 
27 
28 
29 
30 
31 

$6 
6 
6 
6 
6 
,6 

$9 
9 
8 
9 
9 
9 

$11 
11 
11 
11 
11 
11 

$13 
13 
13 
13 
13 
13 

$Ji 

15 
15 
15 
15 

»» 

17 
17 
17 
17 

$20 
20 
19 
19 
19 
19 

$22 
22 
22 
22 
22 
21 

SPECIMEN  INDUSTRIAL  POLICY 


459 


AGE 

AT 

ISSUE 

END  OF 
5 
YEARS 

END  or 
6 
YEARS 

END  OF 
7 
YEARS 

END  OF 
8 
YEARS 

END  OF 
9 

YEARS 

END  OF 
10 

YEARS 

END  OF 
11 
YEARS 

END  or 
12 
YBABS 

32 
33 
34 
35 

7 
7 
7 
7 

9 
9 
9 
9 

11 
11 
11 
11 

13 
13 
13 
13 

15 
15 
15 
15 

17 
17 

17 
17 

19 
19 
19 
19 

21 
21 
21 
21 

AGE 

AT 

ISSUE 

END  OF 
13 

YEARS 

END  OF 
14 
YEARS 

END  OF 
15 
YEARS 

END  OF 
16 
YEARS 

END  OF 
17 
YEARS 

END  OF 
18 
YEARS 

END  OF 
19 
YEARS 

END  OF 
20 
YEARS 

26 
27 
28 
29 
30 
31 
32 
33 
34 
35 

$24 
24 
24 
24 
24 
23 
23 
23 
23 
23 

$26 
26 
26 
26 
26 
25 
25 
25 
25 
25 

$28 
28 
28 
28 
28 
27 
27 
27 
27 
27 

$30 
30 
30 
30 
30 
29 
29 
29 
29 
28 

$33 
32 
32 
32 
32 
31 
31 
31 
31 
30 

$35 
34 
34 
34 
33 
33 
33 
32 
.  32 
32 

$37 
36 
36 
36 
35 
35 
34 
34 
34 
34 

$39 
38 
381 
37 
37 
36' 
36; 
36 
36 
35 

OPTION  2  —  Or,  with  the  written  assent  of  the  person  to* 
whom  the  policy  is  payable,  pay  the  CASH  SURRENDER  VALUE' 
according  to  Table  C,  within  sixty  days  after  written  demand' 
therefor. 

TABLE  C. —  The  amounts  in  this  table  are  based  on  a  weekly  premium  of  five 
cents.  If  the  weeklj*  premium  on  this  policy  is  ten  cents,  the  Cash  Surrender 
Value  will  be  twice  the  amount  stated  in  this  table:  if  fifteen  cents,  three  times, 
and  so  on. 


AGE 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

AT 

5 

6 

7 

8 

9 

10 

11 

12 

ISSUE 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

YFARS 

YEARS 

26 

$2.49 

$3.46 

$4.46 

$5.48 

$6.53 

$7.61 

$8.73 

$9.87 

27 

2.53 

3.51 

4.52 

5.56 

6.63 

7.73 

8.87 

10.03 

28 

2.55 

3.54 

4.55 

5.59 

6.67 

7.78 

8.91 

10.08 

29 

2.62 

3.62 

4.65 

5.72 

6.81 

7.93 

9.08 

10.26 

30 

2.71 

3.73 

4.78 

5.85 

6.96 

8.10 

9.26 

10.45 

31 

2.78 

3.80 

4.85 

5.93 

7.03 

8.16 

9.33 

10.52 

32 

2.89 

3.93 

4.99 

6.08 

7.20 

8.34 

9.51 

10.71 

33 

3.01 

4.06 

5.13 

6.23 

7.36 

8.52 

9.70 

10.90 

34 

3.13 

4.19 

5.27 

6.38 

7.52 

8.68 

9.87 

11.09 

35 

3.24 

4.31 

5.40 

6.52 

7.67 

8.84 

10.04 

11.26 

AGE 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

END  OF 

END  or 

END  OF 

AT 

13 

14 

15 

16 

17 

18 

19 

20 

ISSUE 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

YEARS 

26 

$11.05 

$12.26 

$13.50 

$14.77 

$16.07 

$17.40 

$18.76 

$20.14 

27 

11.22 

12.45 

13.70 

•     14.99 

16.30 

17.64 

19.01 

20.41 

28 

11.27 

12.50 

13.75 

15.03 

16.34 

17.68 

19.04 

20.43 

29 

11.47 

12.71 

13.97 

35.27 

16.58 

17.93 

19.30 

20.70 

30 

11.67 

12.92 

14.20 

15.50 

16.83 

18.19 

19.56 

20.97 

31 

11.73 

12.97 

14.24 

15.54 

16.85 

18.20 

19.56 

20.95 

32 

11.94 

13.19 

14.46 

15.76 

17.09 

18.43 

19.80 

21.19 

33 

12.14 

13.39 

14.67 

/L5.98 

17.30 

18.65 

20.02 

21.41 

34 

12.32 

13.59 

14.87 

16.18 

17.51 

18.86 

20.22 

21.61 

35 

12.50 

13.77 

15.05 

16.36 

17.69 

19.04 

20.40 

21.79 

460       THE  PRINCIPLES  OF  LIFE  INSURANCE 


The  figures  in  Tables  A,  B  and  C  are  for  the  end  of  the  full 
paid  policy  year,  on  the  assumption  that  there  is  no  indebted- 
ness then  existing  hereon.  The  figures  for  additional  years  will 
be  furnished  on  request. 

If  neither  the  option  of  paid-up  policy  nor  of  cash  surrender 
value  be  chosen  as  above  provided,  then  the  policy  will  be  con- 
tinued as  extended  insurance,  subject  to  its  terms. 

This  policy  is  based  on  reserves  calculated  upon  the  Stand- 
ard Industrial  Mortality  Table  with  interest  assumed  at  three 
and  one-half  per  cent.  The  values  and  extension  terms  stated 
herein  are  the  equivalents  of  the  reserve  at  the  end  of  each  full 
paid  policy  year,  less  an  amount  not  exceeding  two  and  one- 
half  per  cent,  of  the  full  policy  amount.  They  will  be  in- 
creased by  a  proportionate  part  of  the  difference  between  such 
reserve  and  that  of  the  succeeding  year  for  each  thirteen  weeks 
premiums  paid  beyond  the  full  paid  policy  year,  and  will  be 
lessened  by  deduction  from  such  reserve  of  any  indebtedness 
to  the  Company  on  or  secured  by  the  policy. 

A  paid-up  policy  issued  under  the  terms  hereof  will  have  a 
surrender  value  which  will  be  its  net  value  at  the  date  of  the 
demand  therefor,  less  any  indebtedness  on  or,  secured  by  the 
policy;  and  if  this  policy  shall  become  extended  insurance  after 
payment  of  premiums  for  five  full  years,  it  will  have  a  sur- 
render value,  similarly  determined,  but  decreasing  and  expir- 
ing with  the  extension  term.  The  Company  will  pay  such  value 
within  sixty  days  after  written  demand  therefor,  upon  sur- 
render of  the  policy,  with  the  written  assent  of  the  person  to 
whom  it  is  payable. 

Alterations,  Erasures  and  Waivers.  No  modification, 
change  or  alteration  hereof  or  endorsement  hereon  will  be  valid 
unless  signed  by  the  President,  a  Vice-President,  the  Secretary 
or  an  Assistant  Secretary,  and  no  other  person  is  authorized 
on  behalf  of  the  Company  to  make,  alter  or  discharge  this 
contract  or  to  waive  forfeiture.  Agents  are  not  authorized  to 
waive  any  of  the  terms  or  conditions  of  this  policy  or  to  extend 
the  time  for  payment  of  premiums  or  other  moneys  due  to  the 
Company,  or  to  bind  the  Company  by  making  any  promise  or 
by  accepting  any  representation  or  information  not  contained  in 
the  application  for  this  policy. 

Payment  of  Premiums.  Premiums  hereon  are  payable  at  the 

Home  Office  of  the  Company  in  ,  but  may  be  paid  to  any 

of  its  authorized  Agents,  subject  to  the  conditions  of  the  pol- 
icy. Should  such  Agent  fail  to  call  for  any  premium  when 


SPECIMEN  INDUSTRIAL  POLICY  461 

due,  it  will  be  the  duty  of  the  Insured  to  make  immediate 
payment  of  the  premiums  either  to  the  District  Office  or  to  the 
Home  Office.  Failure  of  the  Agent  to  collect  premiums  will 
not  relieve  the  Insured  from  the  obligation  to  pay  the  premiums 
when  due,  nor  will  the  Company  assume  any  liability  for  such 
failure.  No  payment  of  premium  shall  be  valid  unless  entered 
in  the  Premium  Receipt  Book  at  the  time  of  payment,  by  the 
Agent,  or  other  representative  of  the  Company,  authorized  to 
receive  it,  nor  if  made  when  more  than  four  weeks  in  arrears, 
except  as  herein  provided  under  "  Reinstatement." 

Policy  When  Void.  This  policy  shall  be  void,  if  in  the  ap- 
plication therefor,  there  is  any  misrepresentation,  willfully  made 
or  relating  to  a  matter  increasing  the  risk  of  loss;  or  if  any 
premium  shall  not  be  paid  when  due,  except  as  herein  pro- 
vided ;  or  if  the  policy  be  assigned  or  pledged ;  or  if  any  erasure 
or  alteration  be  made  otherwise  than  as  herein  provided;  or  if 
an  Industrial  or  Weekly  Premium  policy  previously  issued  by 
this  Company  on  the  life  of  the  Insured  shall  be  in  force  on 
the  date  hereof  or  running  as  extended  insurance,  unless  this 
policy  bears  an  endorsement  signed  by  the  President,  a  Vice- 
President,  the  Secretary  or  an  Assistant  Secretary,  authoriz- 
ing its  continuance  in  addition  to  such  previously  issued  in- 
surance. The  Company  shall  not  be  presumed  or  held  to  know 
of  the  issue  of  any  prior  policy  or  the  existence  of  any  previous 
application  upon  which  a  policy  may  not  have  been  issued,  and 
the  issue  of  this  policy  shall  not  be  deemed  a  waiver  of  this 
condition. 

Proof  of  Claim.  In  case  of  death  of  the  Insured,  proofs  of 
claim  shall  be  made  on  blanks  to  be  provided  by  the  Company 
and  shall  contain  full  answers  of  the  claimant,  physician  and 
other  persons  to  all  the  questions  asked  therein  and  shall  con- 
form to  all  the  requirements  thereof. 


APPENDIX  IV 

SPECIMEN  COPY  OF  A  WHOLE-LIFE  ANNUT 
CONTRACT 

THE LIFE  INSURANCE  COMPANY 

Single  Premium 
$10,000 
Age  60 

Number  

Annuity : 
$863.70/100 
Every  Year 
In  consideration  of  the  payment  of  Ten  Thousand  Dollars 

agrees  to  pay  at  its  Home  Office  in  the  City  of ,  ,  to 

RICHARD  ROE  an  Annual  Annuity  of  Eight  Hundred  and 
Sixty-three  and  70/100  Dollars  —  during  the  lifetime  of  the 
said  RICHARD  ROE  (herein  called  the  Annuitant). 

The  first  Annuity  shall  be  payable  on  the  First  day  of  July, 
Nineteen  hundred  and  twelve,  if  the  Annuitant  is  then  living, 
and  subsequent  payments  Annually  thereafter,  said  Annuity 
terminating  with  the  last  Annual  payment  preceding  the  death 
of  the  Annuitant. 

Each  Annuity  will  be  paid  by  check  to  the  order  of  the  per- 
son entitled  to  receive  the  same,  which  check  will  require  the 
personal  endorsement  of  the  payee  as  proof  of  survival. 

Age.  If  the  age  of  the  Annuitant  has  been  misstated,  the 
amount  payable  hereunder  shall  be  such  as  the  actual  money 
paid  would  have  purchased  at  the  Society's  annuity  rates  in 
use  at  the  register  date  of  this  contract  at  the  correct  age; 
any  overpayment  or  overpayments  by  the  Society,  with  interest 
thereon,  shall  be  charged  against  the  payments  to  be  made  after 
adjustment. 

The  Contract.  The  entire  agreement  between  the  parties 
hereto  is  comprised  in  this  contract.  No  person  except  an  Ex- 
ecutive Officer  of  the  Society  —  President,  a  Vice-President, 
Secretary,  Assistant  Secretary,  Comptroller,  Deputy  Comp- 

462 


ANNUITY  CONTKACT  463 

troller,  Treasurer,  an  Assistant  Treasurer  —  has  the  power  to 
modify  this  contract.  This  contract  does  not  participate  in 
Surplus. 

Executed,  this  First  day  of  July,  1911,  at  the  Home  Office  of 
the  Society  in . 

EXAMINED   BY 

,  President. 

,  Secretary. 

,  Registrar. 


APPENDIX  V 

SPECIMEN  COPY  OF  A  FRATERNAL  BENEFIT  CER- 
TIFICATE, TOGETHER  WITH  FORM  OF 
APPLICATION 

COPY  OF  BENEFIT  CERTIFICATE 

/SUPREME  COUNCIL!                               /SUBORDINATE  COUNCIL! 
t            SEAL.           /                               I              SEAL.  / 
This  certificate  is  issued  to  ,  a  member  of  Coun- 
cil,  No.  ,   located  at  ,  upon  evidence  received  from 

said  Council  that  he  is  a  contributor  to  the  Widows  and  Or- 
phans' Benefit  Fund  of  this  Order;  and  upon  condition  that 
this  certificate,  the  Charter  of  the  Order  and  the  statements 
made  by  him  in  his  application  for  membership  in  said  Coun- 
cil, and  the  statements  certified  by  him  to  the  Medical  Exam- 
iner, both  of  which  are  filed  in  the  Supreme  Secretary's  office, 
be  made  a  part  of  this  contract,  and  upon  condition  that  the 
said  member  complies  in  the  future  with  the  laws,  rules  and 
regulations  now  governing  the  said  Council  and  Fund,  or  that 
may  hereafter  be  enacted  by  the  Supreme  Council  to  govern 
said  Council  and  Fund,  and  upon  condition  that  any  changes, 
additions  or  amendments  to  the  Charter,  Constitutions  or 
Laws,  duly  made  or  enacted  subsequent  to  the  issuance  of  this 
Benefit  Certificate,  shall  bind  the  said  member  and  his  bene- 
ficiaries and  shall  govern  and  control  the  agreement  in  all  re- 
spects in  the  same  manner  as  if  such  changes,  additions  or 
amendments  had  been  made  prior  to  and  were  in  force  at  the 
time  of  the  application  for  membership,  and  upon  condition 
that  the  said  member,  for  himself  and  for  any  person  or  per- 
sons accepting  or  acquiring  any  interest  in  this  Benefit  Certifi- 
cate, agrees  that  no  action  at  law  or  in  equity  shall  be  brought 
or  maintained  on  any  cause  or  claim  arising  out  of  any  mem- 
bership in  the  '  or  on  any  Benefit  Certificate,  unless  such 

action  is  brought  within  three  years  from  the  time  when  the 
right  of  action  accrues.  These  conditions  being  complied  with, 
the  Supreme  Council  of  the hereby  promises  and  binds  it- 
self to  pay  out  of  its  Widows  and  Orphans'  Benefit  Fund  to 

464 


FRATERNAL  BENEFIT  CERTIFICATE        465 

the  sum  of Dollars,  in  accordance  with  and  under 

the  provisions  of  the  laws  governing  said  Fund,  upon  satisfac- 
tory evidence  of  the  death  of  said  member,  and  upon  the  sur- 
render of  this  Certificate ;  provided  that  said  member  is  in  good 
standing  in  this  Order  at  the  time  of  his  death,  and  provided 
also  that  this  Certificate  shall  not  have  been  surrendered  by 
said  member  and  another  Certificate  issued  at  his  request,  in 
accordance  with  the  laws  of  this  Order. 

In  witness  whereof  the   Supreme  Council  of  the  has 

hereunto  affixed  its  Seal  and  caused  this  Certificate  to  be  signed 
by  its  Supreme  Regent  and  attested  and  recorded  by  its  Su- 
preme Secretary  at  — i — ,  ,  this  day  of  ,  A.  D. 

19—. 

Attest: ,  SUPREME  SECRETARY. 

,  SUPREME  REGENT. 

I  accept  this  certificate  on  the  conditions  named  herein. 

(Signature  of  Member.) 

Witnessed  and  delivered  in  the  presence  of  either 


REGENT,      \      Of 
EIY,  / 


or        ,  SECRETARY,  J   Council,  No.  . 

FORM  OF  APPLICATION  FOR  MEMBERSHIP  IN  A  FRATERNAL  ORDER 

State  of ,  19—. 

To  the  Officers  and  Members  of Council,  No.  ,  , 

Located  at ,  State  of . 

Having  become  acquainted  with  the  objects  of  your  Order, 

I  hereby  make  application  for  — < —  amount  membership 

Write  whether  "  Option  A  "  or  "  Option  D." 
in  your  Council,  and  do  declare,  upon  my  honor  as  a  man, 
that  the  statements  by  me  subscribed  herein  are  each  and  every 
one  of  them  true.  I  am  not  now  a  member  of  this  Order;  I 
have  not,  within  six  months,  been  rejected;  am  not  now  under 
suspension,  and  have  never  been  expelled  from  any  Council  of 
this  Order ;  and  am  a  believer  in  a  Supreme  Being. 

I  reside  at  No.  — —  St.,  City  or  Town  of ,  State  of . 

I  was  born  at  ,  State  of  ,  on  the  day  of  , 

18 — ,  and  am  between and — • — years  of  age.     My  occupa- 
tion is  that  of .    Place  of  business,  No.  St.,  City  or 

Town  of ,  State  of  — — .    I  direct  that,  in  case  of  my  de- 
cease, all  benefit  to  which  I  may  be  entitled  from  the  be 

paid  to 

Names  of  Beneficiaries.     (Write  name  or  names  in  full.) 


466       THE  PRINCIPLES  OF  LIFE  INSURANCE 

Residence  of  Beneficiaries.     (Give  complete  address.) 

Related  to  me  as 

Ages  of  Beneficiaries. 

Subject  to  such  future  disposal  of  the  benefit,  as  I  may  here- 
after direct,  in  compliance  with  the  Laws  of  the  Order.  I  am 
temperate  in  my  habits,  and  have  no  injury  or  disease  which 
will  tend  to  shorten  my  life;  am  now  in  good  health  and  am 
able  to  gain  a  livelihood.  I  do  hereby  warrant  the  truthful- 
ness of  the  statements  in  this  application,  and  consent  and 
agree  that  any  untrue  or  fraudulent  statements,  or  any  con- 
cealment of  facts,  therein,  or  to  or  from  the  Medical  Examiner, 
or  my  suspension  or  expulsion  from,  or  voluntarily  severing 
my  connection  with  the  Order,  shall  forfeit  the  rights  of  my- 
self and  my  beneficiaries,  heirs,  and  all  other  persons  claim- 
ing under  my  Benefit  Certificate  issued  hereon,  or  from  my 
membership  in  the  Order,  to  all  benefits  and  privileges  therein. 
I  agree  for  myself,  my  beneficiaries,  heirs,  and  all  such  other 
persons,  that  in  any  and  all  questions,  controversies,  actions 
and  trials  in  court,  or  otherwise,  which  shall  arise  between  my- 
self and  between  them,  or  any  of  them,  and  the  Supreme  Coun- 
cil of  the  ,  and  any  Grand  or  Subordinate  Council  there- 
of, it  shall  be  presumed  and  taken  prima  facie,  that  every  offi- 
cer of  said  Supreme,  of  every  Grand  and  of  every  Subordinate 
Council,  in  the  sending  of  notices  and  otherwise  has  in  all 
respects  fully  performed  his  duty,  and  fully  complied  with  all 
the  laws  of  said  Councils,  and  that  the  burden  of  proving  any 
failure  of  such  performance  or  compliance  shall  rest  upon  me 
and  said  beneficiaries,  heirs  or  said  other  persons;  that  any 
iSubordinate  Council  of  which  I  may  become  a  member  or  its 
officers  or  any  one  or  more  thereof,  shall  not  have  the  power  to 
waive  the  performance  of  or  compliance  with  any  law  or  re- 
quirement of  the  Supreme  Council,  and  any  such  attempted 
waiver  shall  be  inoperative  to  bind  or  create  any  liability  upon 
the  Supreme  Council ;  that  any  knowledge  or  information  which 
may  be  acquired  by  any  Subordinate  Council  of  which  I  may 
be  a  member,  or  by  any  officer  or  member  thereof,  and  not  im- 
parted or  disclosed  to  the  Supreme  Council,  shall  not  be  deemed 
to  be  notice  to  the  Supreme  Council,  and  the  said  Supreme 
Council  shall  not  be  bound  thereby;  that  I  will  and  they  shall 
conform  to  and  abide  by  the  Constitutions,  Laws,  Rules  and 
Usages  of  the  said  Council  and  Order  now  in  force,  or  which 
may  hereafter  be  adopted  by  the  same.  If  I  refuse  or  neglect 
to  undergo  an  examination  within  six  weeks  from  the  date  of 


FEATEENAL  BENEFIT  CEETIFICATE        467 

notice  from  the  Secretary  of  said  Council  to  present  myself  to 
the  Medical  Examiner,  or  if  I  fail  to  present  myself  for  initia- 
tion within  sixty  days  from  the  date  of  the  approval  of  my 
medical  examination,  I  hereby  agree  that  my  medical  exami- 
nation and  my  initiation  thereafter,  without  further  medical 
examination,  unless,  authorized  by  the  Supreme  Kegent,  shall 
be  void,  and  I  hereby  accept  notice  of  the  fact  that  no  Sub- 
ordinate Council  has  power  or  authority  to  waive  the  same; 
and  I  agree  that  my  proposition  fee  shall  be  forfeited,  that 
my  first  election  may  be  declared  void,  and  a  new  ballot  be 
taken  by  said  Council  at  any  time  before  I  receive  the  De- 
gree. And  for  myself,  and  for  any  person  accepting  or  acquir- 
ing any  interest  in  any  Benefit  Certificate  issued  on  this  appli- 
cation, I  hereby  expressly  waive  any  and  all  provisions  of  law 
now  existing,  or  that  may  hereafter  exist,  preventing  any  physi- 
cian from  disclosing  any  information  acquired  in  attending 
me  in  a  professional  capacity  or  otherwise,  or  rendering  him 
incompetent  as  a  witness  in  any  way  whatever;  and  I  hereby 
consent  and  request  that  any  such  physician  testify  concern- 
ing my  health  and  physical  condition,  past,  present  or  future. 
And  for  myself,  and  for  any  person  or  persons  accepting  or 
acquiring  any  interest  in  any  Benefit  Certificate  issued  on  this 
application,  or  arising  out  of  any  membership  therein,  I  agree 
that  no  action  at  law  or  in  equity  shall  be  brought  or  main- 
tained on  any  cause  or  claim  arising  out  of  any  membership, 
or  on  said  Benefit  Certificate  unless  such  action  is  brought 
within  three  years  from  the  time  when  the  right  of  action  ac- 
crues; or  if  the  action  arises  upon  my  death,  or  alleged  death, 
within  three  years  from  the  date  of  such  death,  and  that  in 
case  I  shall,  within  five  years  from  and  including  the  date  of 
my  initiation,  enter  upon  or  become  engaged  in  a  proscribed 
occupation,  or  take  my  own  life,  whether  sane  or  insane,  or,  in 
case,  after  having  been  suspended  for  one  year  or  more  I  shall, 
within  five  years  from  the  date  of  my  reinstatement,  take  my 
own  life,  whether  sane  or  insane,  or  if  my  death  shall  be  caused, 
at  any  time,  by  the  excessive  use  of  intoxicating  liquor,  or 
be  the  result  of  my  violation  of,  or  occur  while  I  am  violating 
any  law,  the  punishment  for  which  is  death  or  imprisonment 
in  a  State  or  Provincial  prison  or  penitentiary,  my  Benefit  Cer- 
tificate shall  become  and  be  null  and  void,  and  no  person  or 
persons  be  entitled  to  a  benefit  thereunder  or  under  my  mem- 
bership in  the  Order. 


468        THE  PRINCIPLES  OF  LIFE  INSURANCE 
Recommended  by  — — .    Applicant  will  write  his  name  IN 


FULL. 


(Recommenders  must  sign  personally.) 

I  hereby  certify  that  the  above  Application  of 

Write  applicant's  name  IN  FULL. 

was  received  by  me  on  the  day  of  — - — ,  19 — ,  and  was 

read  at  a  stated  meeting  of  the  above-named  Council,  on  the 

day  of ,  19 — ;  that  he  was  notified  by  me  on  the 

day  of  ,   19 — ,   to  present  himself  to  Dr.  ,   Medical 

Examiner. 

,  Secretary. 

Address, . 

I  hereby  certify  that  he  was  duly  elected  by  ballot  on  the 
day  of ,  19 — ;  and  that  he  was  admitted  to  member- 
ship by  the  conferring  of  the  Degree  according  to  the  prescribed 

Ritual  of  the  ,  on  the  — r—  day  of  ,  19—.    Number 

on  Roll  Book . 

,  Secretary. 


QUESTIONS   TO  BE  ASKED  BY   THE   COLLECTOR  ON   THE   NIGHT   OF 
INITIATION. 

Ques. — ls  the  date  of  your  birth  correctly  stated  above? 
not,  please  correct  it. 

Ques. —  Have  you   changed   your   occupation   since   date 
your  application?    If  so,  what  is  now  your  occupation? 

Ques. —  Has  your  physical  condition  changed  since  your  ex- 
amination for  admission? 

I  hereby  certify  that 

Write  applicant's  name  IN  FULL. 

on  the day  of ,  19 — ,  paid  to  me  $ as  his  asse 

ment  for  the  W.  &  O.  B.  Fund  for  age 

(Attained  age  nearest  birthday.) 

and  that  the  same  has  been  entered  in  the  W.  &  O.  B.  Fund  Ac- 
count Book  accordingly. 

This  Application  must  be  sent  to  the  Supreme  Secretary, 
with  blanks  properly  filled  by  Secretary  and  Collector  of  Subor- 
dinate Council,  immediately  after  the  admission  of  applicant, 

,  Collector. 

and  Benefit  Certificate  will  be  returned. 


= 


- 


INDEX 


INDEX 


Actuaries,   or   Seventeen   Offices, 

table,    136-137 

Admission  of  companies,  359,  365 
Advantages     of     life     insurance. 

See  Life  insurance 
Adverse  mortality  selection,  235, 

236,  266-267 

Age   of   applicant,   policy   provi- 
sion relating  to,  375 

statements  relating  to,  374-375 
Agents,    in    branch-office    system, 
338 

brokers  distinguished  from, 
418-419 

commissions  paid  to,  334-335 

in  direct-agency  system,  335 

effect  of  opinions  of,  on  the 
meaning  of  policy  provi- 
sions, 424 

in  general-agency  system,  335, 
336-338 

home  office  in  its  relation  to, 
333-334 

industrial  policies  limit  pow- 
tion  and  management  of, 
279-280 

industrial  policies,  limit  pow- 
ers of,  282 

law  pertaining  to,  416-424 

liability  of,  to  principal  for 
injury  occasioned  by  mis- 
conduct, 424 

misrepresentations  by,  with 
reference  to  disability  in- 
surance, 289-290 

necessity    for,    429-430 

oral  waiver  by,  effectiveness  of, 
422-423 

organization  and  management 
by,  332-340 

policy  provisions  pertaining  to, 
in  industrial  policies,  421- 
423 


Agents  —  Confd. 

in  ordinary  life  policies,  421- 

423 

powers  of,  423-424 
professional  view  to  be  taken 

by,  427-437 

state  statutes   in  relation   to: 
appointment  and  licensing, 
419-420 
definition   of  term   "agent," 

417-419 
prohibition     of    misconduct, 

420 

Aggregate  mortality  tables,  136 
American  Experience  table.     See 

Mortality  tables. 
Annual  level  premium,  definition 

of,  48 

nature  of,   143 

Annuities,  classification  of,  58-59 
cost  of,  illustrated,   113 
deferred,  59,  114-115 
definition  of,  24,  58,  111 
guaranteeing  a  minimum  num- 
ber of  payments,   114 
immediate,    and    their    advan- 
tages,   112-114 
last-survivor,    115 
manner  of  paying  for,  48 
net   single   premium   computa- 
tions in,  164-173 
purpose    of,    23-25 
whole-life  and  term,  58 
Annuity        contract,        specimen 

copy  of,  462 
Annuity      payments,      disability 

clause  providing  for,  301 
Anderson,       Stewart,       citations 
from,    relative   to,    use    of 
life  insurance  as  a  means 
of  protecting  credit,  34 
volume  of  business  life  insur- 
ance, 29 


471 


472 


INDEX 


Application,  age  of  applicant  as 
stated  in,  statements  re- 
lating to,  374-375 

definition  of,  372 

legal  interpretation  of,  general 
rules  underlying,  369-372 

part  of  contract,  372-373 

specimen  copy  of,  449 

statements  in,  as  to  family  re- 
lationships and  family  his- 
tory, 374 

as  to  health,  habits  and  medi- 
cal attendance,  373-374 
relating   to   other   insurance 
and   rejected  applications, 
375 

Assessment  associations,  assess- 
ment plans  used  by,  272- 
274 

business,  271-272 

reorganizations  of,  271 
Assessment  plans,  flat,  266-267 

fraternal  insurance  in,  266-268 

graded,  267-268 

See    also    Assessment    associa- 
tions 
Assignee,    insurable    interest    of, 

389-391 

Assignments  of  policies,  by  as- 
signee, 414-415 

by  beneficiary,  413-414 

law  pertaining  to,  409-415 

policy  restrictions  relating  to, 
and  interpretation  of,  410- 
413 

reasons  justifying,  410 

Beneficiary,  assignments  by,  regu- 
lated   by    state    statutes, 
413-414 
cessation  of  interest  of,  effect 

of,    407-408 
claims  of  creditors  in  relation 

to,  397-404 

clauses  relating  to,  397-398 
designation  of,  406^07 
industrial    policy    requirement 

relating  to,  282-283,  402 
law  pertaining  to,  394-408 
methods  of  revoking,  397-398 
reserving  right  to  change,  397- 
402 


Beneficiary  —  Cont'd. 

transmissibility  of  interest  of, 

404-406 
vested  rights  of,  394-396 

Benefit  certificate,  nature  of,  263- 

266 
specimen  copy  of,  464 

Bond  issues,  life  insurance  as  se- 
curity for,  38-39 

Borrowing  without  collateral 
made  possible  through  life 
insurance,  42-45 

Branch-office  system,  338 

Brokerage,  335,  418-419 

Business  failures,  3'0-31 


Capitalization  of  the  value  of  a 
humac  life,  13,  14-15 

Cash   and   loan   values:    limited- 
payment  policy,  83-85 
paid-up  extension  values,  237 
usefulness     during     times     of 
financial  stringency,  40-42 
whole-life  policies,  75-76 
See  Surrender  values 

Childs,  A.  E.,  citation  from,  rela- 
tive to  policy  loans,  242, 
290 

Child  endowment  policies,  52,  88 

Collateral  loan  investments,  352 

Commissioners  of  insurance, 
duties  and  powers  of,  357- 
358,  360 

Commissions,  methods  of  pay- 
ing, to  agents,  334-335 

Committees.  See  Home  office  or- 
ganization 

Companies.  See  Stock  com- 
panies, Mutual  companies 
and  Mixed  companies ;, 
also  Home  office  organiza- 
tion and  Agency  organiza- 
tion 

Conservation  of  health  and  life 
promoted  by  life  insurance, 
27-28 

Contingent  or  survivorship  insur- 
ance, 57 

Contingent  interests  made  mar- 
ketable through  life  insur- 
ance, 45-46 


INDEX 


473 


Continuous-installment  policies, 
advantages  of,  54,  102-103, 
103-106 

nature  of,   102-103 
premiums    compared    of,    with 
those  on  a  whole-life  pol- 
icy, 104-106 

Contribution  plan  of  apportion- 
ing surplus,  249-250 

Conversion  privilege,  advantages 
of,  in  term  policies,  70 

Corporation  bond  investment,  26, 
345,  348-349 

Craig,  James  M.,  citation  from, 
relative  to  stock  com- 
panies, 317 

Credit,  life  insurance  as  a  means 
of  strengthening,  36,  38- 
39 

Creditors,  insurable  interest  of,  in 

life  of  debtor,  386-388 
rights  of,  to  life-insurance  pol- 
icies, 402-404 

Dawson,  Miles  M.,  citations  from, 
relative  to,  assessment  as- 
sociations,  273-274 
contribution  plan,  249 
endowment   policies   as   invest- 
ments, 90-91 

law  of   average  in   life  insur- 
ance, 6 

necessity   of   accumulating   in- 
surance funds,  7 
saving  from  mortality,  247 
Debenture  bonds,  55 
Deferred  annuities,  advantages  of, 

168-169 

definition  of,  114-115 
net  annual  level  premium  com- 
putation  in,    183-185 
net   single   premium   computa- 
tions in,   168-173 
return  premium  feature  applied 

to,  59,  173 

Deferred  dividend  plan,  253-258 
Deferred  dividend  policies,  250 
Dexter,  George  T.,  citations  from, 
relative    to,    mutual    com- 
panies, 318 
stock  companies,  317 
Direct-agency  system,  335 


Disability  insurance,  age  and  time 
limits  to  the  application 
of,  297-299 

benefits  granted  in,  299-301 

causes  of  disability  in,  295- 
297 

definition  of  disability  in,  290, 
294-297 

development     of,     in     Europe, 

284 
in  the  United  States,  286 

disability  statistics  in,  290 

dividend  payment  in,  after  dis- 
ability, 301-302 

nature  of  protection  in,  58 

nature  of  risk  in,  287-288 

objections  urged  against,  288- 
291 

reasons  for,  58,  286 

risks  not  covered  in,  292-294 
Discrimination     between     insur- 
ants, 360 

Dividends,  forms  In  which  re- 
ceived, 255-256 

mixed  companies,  in  relation 
to,  322 

payment    of,    after    disability, 

301-302 
under  annual  dividend  plan, 

252 

under  deferred  dividend  plan, 
253-255 

stock  and  mutual  plans  com- 
pared in  connection  with, 
315-316 

Tontine  plan  and,  253 
Double  endowments,  51-52 

Employees,    group    insurance    of, 

304-310 
insurance  of,  for  the  benefit  of 

their  families,  36-38 
life       insurance       indemnifies 

against    loss    of,    through 

death,  31-34 
Endowment    insurance,    a   means 

of  providing  for  old  age, 

92-94 

an  incentive  to  save,  91-92 
business  uses  of,  97 
child  endowment  policies  and, 

88 


474 


INDEX 


Endowment  insurance  —  Cont'd. 

definition  of,  50-51,  87 

family  uses  of,  98 

funds  for  specific  purposes  ac- 
cumulated by  means  of, 
97-98 

investment  feature  of,  88-89, 
95-97 

long-term,  advantage  of,  92- 
94 

nature  of,  88-97 

nature  of  the  premium  in,  51, 
159-160 

net  single  premium  computa- 
tion in,  159-160 

policy  analyzed,  88-89 
types  of,  *5 1-52,  87-88 

premium  charged  for,  89-90 

saving  period  hedged  by,  94-97 

sinking  funds  accumulated  by 
means  of,  39-40 

term  insurance  feature  of,  88- 
89,  95-97 

thrift  encouraged  by,  21-22 
Expenses   of   life-insurance   com- 
panies,    classification     of, 
219-221 

distribution  of,  212-213 

group  insurance  in,  306-307 

incidence  of,  219-221 

methods  of  loading  and,  214- 
219 

state    regulation    of,    361-362, 

365 

Extension  participating  values, 
limited-payment  policy 
and,  84,  85 

whole-life  policy  and,  75-76,  77 

Fackler,  Edward  B.,  citation 
from,  relative  to  surrender 
charges,  235-236 
Family  relationships  and  family 
history,  statements  relat- 
ing to,  374 

Federal  regulation,  356,  364-366 
Fitting  the  policy  to  the  client, 

60-61 

Flat  assessment  plan,  266-267 
Forfeitures,  gains  from,  248-249 
Fraternal  insurance,  adoption  of 
protective  features  of  old 


Fraternal  insurance  —  Cont'd. 

line  insurance  in,  268-269 

application  for  benefit  certifi- 
cate in,  specimen  copy  of, 
465 

assessment  plans  used  by,  266- 
268 

benefit  certificate  in,  copy  of, 
464 

distinctive  characteristics  of, 
263-264 

extent  of,  5,  261 

legal  status  of,  261-262 

legislation  concerning  rate  ad- 
justments in,  269-271 

Mobile   bill,    269-271 

National  Fraternal  Congress 
table,  137 

organization  and  government 
in,  261-262 

purpose  of,  261-262 

step-rate  plan  in,  used  by  many 
societies,  49-50 


General-agency  system,  335,  336- 

338 

Gephart,  W.  F.,  citation  from,  rel- 
ative to  apportionment  of 
surplus,  251 
Government     bond     investments, 

345,  348-349 

Graded  assessments,  267-268 
Group  insurance,  benefits  of,  308- 

309 

development  of,  304 
functions  of,  309-310 
nature    of    group    insured    i 

304-306 
policy  in,  306 
purpose  of,  304-306 
rates  in,  nature  of,  306-308 
Gross  premium,  definition  of,  149, 

209 

See  also  Loading 
Guaranteed  interest  bonds,   106- 
107 


- 


Habits,  statements  as  to,  373-374 
Health,    statements   as   to,    373- 
374 


INDEX 


475 


Hoffman,  F.  L.,  citation  from, 
relative  to  industrial  in- 
surance, 279 

Holcombe,  John  M.,  citations 
from,  relative  to,  advan- 
tages of  life  insurance  to 
society,  25 

origin  of  life  insurance,  4 
Home-office  organization,  adminis- 
trative   officials    in,    324, 
329-330 
advisory  officials  in,  324,  330- 

331 

board  of  directors  and  commit- 
tees   in,    chosen    from    its 
membership,    326-328 
deliberative  bodies  in,  324 
executive  committee  in,  328 
executive  officials  in,  324,  328- 

329 
field  force,  in  relation  to,  333- 

334 

finance  committee  in,  328 
office  departments  in,  325-327 
Hudnut,  James  M.,  citation  from, 
relative    to    non-forfeiture 
laws,    232-233 


Income     policies,     a     guarantee 

against   loss   of   principal, 

20 

See  also  Installment  policies 
Incontestable   clause,  advantages 

of,  379-381 
industrial  policies  contain  an, 

281 
policy    provision    relating    to, 

379 
Industrial  insurance,  amount  of 

insurance  in,   adjusted  to 

unit  of  premium,  277 
beneficiary  clauses  contained  in, 

402 
comparison     of,     with     other 

forms    of    life    insurance, 

277-278 
distinctive     features     of     the 

policy  in,  280-283 
extent  of,  275-277 
organization   and  management 

of  agents  in,  279-280 


Industrial  insurance  —  Cont'd. 

premiums  in,  paid  weekly,  277 

purpose  of,  275 

specimen     copy     of     whole-life 

policy  in,  455 
Installment  policies,  continuous, 

54,  102-106 

debenture  bonds  and,  55,  106- 

107 

definition  of,  52 
disability,  300-301 
guaranteed   interest   bonds   in, 

55,  106-107 

methods  of  charging  premiums 
in,  53 

nature  of,  99,  161 

net  single  premium  computa- 
tion in,  161-164 

ordinary,   100-101 

premiums  in,  compared  with 
those  charged  under  other 
policies,  104-106 

purpose  of,  99-100 

reversionary  annuities  and,  55 

survivorship,  101-102 

various  types  of,  52-55 
Insurable      interest,      assignee's, 
389-391 

creditor's,  in  life  of  debtor, 
386-388 

definition  of,  384 

growing  out  of  other  business 
relations,  388-389 

growing  out  of  ties  of  affection, 
blood  or  marriage,  391- 
392 

indemnity  principle  and,  in  re- 
lation to  life  insurance, 
369-370 

insured's,  in  his  own  life,  385- 
386 

time   and   continuity   of,   392- 

393 
Interest  factor  in  life  insurance, 

143-145 
Interest  rate  learned,  method  of 

arriving  at,  353-354 
Interest  rates  earned  by  life-in- 
surance companies,  19,  20, 
343,  352,  353 

Investment,  life  insurance  a  prof- 
itable and  safe,  19-20 


476 


INDEX 


Investment  earnings,  in  relation 

to  surplus,  246 

Investment  feature  of  life  insur- 
ance, 88-89,  140 

Investments,  life-insurance,  342- 
354 

cash  in  offices  and  banks,  352 

collateral  loans,  352 

corporation  bonds,  345,  348- 
349 

classes  of,  348-352 

considerations  that  should  gov- 
ern, 342-344 

corporation  stocks,  345,  351- 
352 

extent  of,  26-27,  346-348 

finance  committee,  in  relation 
to,  328 

government  bonds,  345,  348— 
349 

influence  of,  26-27 

manner  of  arriving  at  the  rate 
earned  in,  353-354 

net  deferred  and  unpaid  pre- 
miums, 352 

premium  notes  and  policy 
loans,  350 

rate  of  interest  earned  in,  352- 
353 

real-estate,  345,  350-351 

real-estate  mortgages,  345,  349- 
350 

reasons  why  important,  342 

safety   of,    19-20 

state  regulation  of,  344-346 

Johnson,  Alba  B.,  citation  from, 
relative  to  the  usefulness 
of  policy  loans,  41-42 
Joint-life  insurance,  business  uses 
of,  34-35 

definition  and  nature  of,  56-108 

disability  insurance  in  relation 
to,  293 

premiums  in,  compared  with 
those  charged  under  other 
policies,  108-110 

types  of,  56-57 

uses  of,  56,  110 

Lapses,  extent  of,  230 


Law  of  average,  combination  of 
many  risks  necessary  for,  5 

relation  of,  to  life  insurance, 
129 

See  also  Mortality  tables 
Laws  of  probability,  application 
of,  to  the  mortality  table, 
137-138 

compound  probabilities,  the  law 
of,  120,  122-123 

law  of  average  and,  124-129 

law  of  certainty  and,  120,  121, 
122 

law  of  mortality  and,  124, 
129 

principles  of,  stated,  120-123 

simple  probabilities  under, 
method  of  determining, 
120,  121,  122 

use     of,     to     forecast     future 

events,    123-124 
Last-survivor  annuities,   115 
Last-survivor   insurance,   57 
Legal  reserve.     See  Reserve 
Legislation.    See  State  regulation 
Life  annuity  due,  nature  of,  176- 

177 

Life  insurance,  accumulation  of  a 
fund  necessary  for  the  pay- 
ment of  claims  in,  7 

advantages  of,  to  society  at 
large,  25-28 

bond  issues  secured  through, 
38-39 

borrowing  without  collateral 
made  possible  through,  42- 
45 

business  uses  of,  29-46 

capitalizes  the  values  of  a  hu- 
man life  and  indemnifies 
that  value,  13,  14-15 

conservation  of  health  and  life 
promoted  by,  27-28 

contingent  interests  made  mar- 
ketable through,  45-46 

credit  strengthened  by,  38-39 

definition    of,    from    the    com- 
munity standpoint,  3 
from  the  standpoint  of  the 
individual,  3 

a  duty,  15-16 

employees  should  take  out,  for 


INDEX 


477 


Life  insurance  —  Cont'd. 

the   benefit  of   their   fam- 
ilies, 36-38 

extent  of,  in  the  United  States, 
5 

facilitates  the  purchase  of  a 
home,  22-23 

family  uses  of,  13-16 

features  peculiar  to: 

fixed  and  unchangeable  pre- 
mium, 141-142 
hazard  of  death,  140-141 
principle    of    indemnity   not 

applicable,   142 
protection    and    investment, 
140 

incomes  assured  through  the 
use  of,  annuities,  23-25 

indemnifies  against  loss 
through  death  of  officials 
and  employees,  31-34 

mortgage  payments  may  be 
hedged  by,  22-23 

opposite  of  gambling,  10-12, 
16 

origin  of,  in  Great  Britain,  3 
in  the  United  States,  4 

partnership  insurance,  34-36 

personal  uses  of,  16-25 

rules  suggesting  the  amount  of, 
to  be  taken,  14-15 

a   safe   investment,    19-20 

saving  made  possible  by,  18- 
19,  21-22 

sinking  funds  accumulated 
through,  39-40 

thrift  encouraged  by,  20-22 

uncertainty  changed  into  cer- 
tainty by,  10-12,  16,  119 

uniform  annual  premiums  in, 
desirability  of,  8-9 

woman's  rights  in  relation  to, 
16 

worry  eliminated  and  initiative 

increased  by,  17 

Life  Extension  Institute,  Inc.,  27 
Limited-payment  policies,  advan- 
tages of,  82-85 

continuous  and,  compared,  177- 
178 

definition  and  nature  of,  49,  79 

disadvantages  of,  81-82 


Lamited-payment          policies  — 

Cont'd. 

guaranteed  values  of,  83-85 
larger  premiums  necessary  un- 
der, 79-81 
manner  of  paying  premiums  in, 

48 

net  annual  level  premium  com- 
putation for,  182-183 
Linton,  M.  Albert,  citation  from, 
relative  to  the  endowment 
policy,  95-97 
Loading,  equitable  distribution  of 

expenses  in,  212-213 
expenses  classified,  210-211 
incidence  of  expense,  219-221 
methods  used  in,  214-219 
modified  preliminary  term  plan 

and,  222,  224-225 
preliminary    term    plan    and, 

222-223 

purpose  of,  209-210 
saving  from  explained,  247-248 
select  and  ultimate  plan,  222, 

225-226 

Loans.     See  Policy  loans 
Loan  values,  usefulness  of,  dur- 
ing    times     of     financial 
stringency,  40-42 
Lunger,  John  B.,  citations  from, 
relative     to,     branch-office 
system,  339,  340 
finance  committee  of  a  life-in- 
surance company,  328 
office  organization  in  life  insur- 
ance, 324-327 


Medical  attendance,  statements  as 

to,  373-374 

Misrepresentation,  360-361,  420 
Mixed  companies,  control  of,  321- 

322 

dividends  of,  322 
nature  of,  314 

retirement  of  stock  of,  provi- 
sions for,  322 
Mobile  bill,  269-271 
Modified   preliminary-term   plan, 

222,  224-225 

Moir,  Henry,  citations  from,  rela- 
tive to,  last-survivor  and 


478 


INDEX 


Moir,  Henry  —  Cont'd. 

contingent  or  survivorship 
insurance,  57 
method  of  arriving  at  rate  of 

earnings,  353-354 
Mortality,  saving  from  explained, 

246-247 

Mortality  tables:  Actuaries,  or 
Seventeen  Offices,  table, 
136-137 

American  Experience  table: 
construction  of,  134-135 
copy  of,  132-133 
origin   of,    137 
description  of,  131-136 
kinds  of:  aggregate  tables,  136 
select  tables,  136 
ultimate  tables,  136 
industrial     insurance,     special 

tables  used  in,  278 
National     Fraternal    Congress 

table,    137 
population  data,  objections  to 

basing,  on,  124,  130-131 
sources  of,  130 
theory  of  probabilities  applied 

to,  137-138 

ultimate  table  of  mortality,  225 
Mutual     companies,     advantages 
urged  in  favor  of,  317-318, 
320-321 

control  of,  compared  with  that 
of  stock  companies,  317- 
318 

loading  of  premiums,  in  rela- 
tion to,  314-317 
nature  of,  313-314 

National  Fraternal  Congress  ta- 
ble, 137,  268-269,  270 
Natural  premium,  definition  and 

nature  of,  9,  48,  62 
Net  annual  level  premium,  analo- 
gous to  annuities,  175-177 
in  deferred  annuity,  computa- 
tion for,   183-185 
due  in  life  annuity,  176-177 
in  limited-payment  life  policy, 

computation  for,  182-183 
nature  of,  174 

in  ordinary  life  insurance, 
computation  for,  179-182 


Net  annual  level  premium  — 
Cont'd. 

reason  for  choosing,  in  prefer- 
ence to  single  payments. 
174-175 

in  return  premium  policies, 
187-190 

in  term  insurance,  computation 

for,  178-179 

Net  level  premium,   174-190 
Net   single    premium,    in    annui- 
ties, computation  for,  164- 
173 

in  deferred  annuities,  computa- 
tion for,  168-173 

in  endowment  insurance,  com- 
putation for,  159-160 

in  installment  insurance,  com- 
putation for,  161-164 

in  pure  endowments,  computa- 
tion for,  158-159 

in  term  insurance,  computation 
for,  149-154 

in    whole-life    insurance,    com- 
putation for,  154-157 
New  business  expenses,  method  of 
meeting,  221-223 

preliminary-term     plan,     222- 

223 

Nichols,  Walter  S.,  citations 
from,  relative  to,  fraternal 
societies,  263 

rate  adjustments  in  fraternal 

insurance,  269 

Non-forfeiture  laws,  231-233 
Non-participating  policies,  245 


Officials.  See  Home-Office  or- 
ganization 

Old  age  provision,  endowment 
insurance  as  a  means  of, 
92-94 

Oral  waiver  of  policy  conditions 
by  agents,  422-423 

Ordinary  installment  policies, 
methods  of  charging  pre- 
miums in,  101 

nature  and  purpose  of,  52-53, 
100-101 

Ordinary  life  policies.  See 
Whole-life  policies 


INDEX 


479 


Other   insurance,   statements  re- 
lating to,  375 

Partnership    insurance,    uses    of, 

and  necessity  for,  34-36 
Participating  paid-up  values,  in 
limited-payment        policy, 
84-85 

in  whole-life  policy,  75-76,  77 
Participating  policies,  245 
Policies,     classifications    of,    ac- 
cording to  inclusion  or  ex- 
clusion of  a  pure  endow- 
ment,  50-52 

according  to  the  method  by 
which  the  proceeds  are 
paid,  52-55 

according  to  the  inclusion  of 
disability    features,    57-58 
according  to  method  of  pay- 
ing premiums,  47-50 
according  to  the  term,  47 
special    types    of    contracts, 

55-57 
combination    of   various   types 

of,  59-60 
group,  304-310 
industrial,  distinctive  features 

of,  280-283 
legal    interpretation    of,    369- 

383 
prohibitions  or  restrictions  in, 

382-383 

restrictions  in,  relating  to  as- 
signments, 410-413 
some  better  adapted  than  oth- 
ers to  meet  special  needs 
of  the  insured,  60-61 
various  types  of,  equivalent  in 

net  cost,  60 

See  also  various  types  of  poli- 
cies,    as,     Term     policies, 
Whole-life   policies,    etc. 
Policy  loans,  advantages  result- 
ing from,  240-241 
desirability  of  restricting,  243 
development  of,  238-239 
extent  of,   241-242 
lapses  and  surrenders  in  rela- 
tion to,  242-244 
nature  of,  239-240 
restrictions  upon,  239-240,  241 


Preliminary-term    plan,    222-223 
Premium  notes  and  policy  loan 

investments,  350 

Premiums,  assumptions  underly- 
ing rate  computations  and, 
142-147 

classification    of,    as    net    and 

gross,  148-149 
as  single  and  periodic,  148 
according  to  the  method  of 
paying,  47-50 

continuous-payment,  disad- 
vantage of,  76-77 

in  endowment  insurance,  com- 
parison of  rates  of,  89-90 

fundamental  principles  under- 
lying the  computation  of, 
139-147 

in  industrial  insurance,  man- 
ner of  paying,  277 

interest  factor  in  computing, 
143-145 

in  joint-life  policies  compared 
with  those  charged  on 
other  policies,  108-110 

level  annual,  desirability  of, 
8-9 

payments  of,  at  intervals  of 
less  than  one  year,  compu- 
tation for,  185-187 

waiver  of,  in  disability  poli- 
cies, 302 

See  also  Level  premium,  Natu- 
ral  premium,    Single   pre- 
mium,      Limited-payment 
plan,  Step-rate  plan 
Probabilities.     See       Laws       of 

probability 
Prohibitions    or    restrictions    in 

policies,  382-383 
Publicity  through  statements  and 

examinations,  360-365 
Pure    endowment,    definition    of, 
50,  88 

in  relation  to  the  payment  of 
dividends,  52 

net  single  premium  computa- 
tions, 158-159 

Rate-making.     See  Premiums 
Real-estate      investments,       345, 
350-351 


-130 


INDEX 


Real-estate  mortgage  investments, 

26,  27,  345,  349-350 
Rebating,  360-361,  420 
Reinsurance     reserve.     See     Re- 
serve 

Representations,   361,   375-376 
Reserve,   basis  of  valuation  for, 
193-194 

comparison  of,  on  different  in- 
terest bases  and  on  differ- 
ent policies,  201-208 

definition  of,  192-193 

financial  importance  of,  191 

in  fraternal  insurance,  absence 
of  adequate,  265,  268 

industrial  insurance  based 
upon,  278 

meaning  of,  9 

method  of  calculating,  annual 
level    premium,    whole-life 
policy,  198-201 
single    premium    whole    life 
policy,  194-198 

origin  of,  192 

prospective,  193 

purpose  of,  192-193 

reinsurance,  193 

retrospective,  193 

unearned  premium,  193 
Reserve  value  of  policies  in  the 

United  States,  9-10 
Return-premium  policies,  in  child 
endowment,  52 

deferred  annuities  containing, 
59,  173 

definition  and  nature  of, 
56 

in  premium  computations,  187- 

190 

Reversionary  annuities,  55 
Richards,  George,  citations  from, 
relative  to,  assignment  of 
policies,   409-410 

construction  of  contract  ac- 
cording to  the  laws  and 
usages  of  the  place  where 
made,  372 

creditors'  insurable  interest, 
386,  387 

incontestable  clause,  381 

insured's  interest  in  his  own 
life,  385 


Richards,  George  —  Cont'd. 
policy  prohibitions  or  restric- 
tions, 383 

statements    in    application    as 
to  health,  habits,  and  med- 
ical attendance,  374 
warranties,  377 

Risk  in  life  insurance,  measure- 
ment of,  119-138 
Rules  suggesting  the  amount  of 
life  insurance  to  be  taken, 
14-15 

Saving,  endowment  insurance  an 

incentive  to,  91-92 
endowment    policy    hedges    pe- 
riod of,  94-97 

limited- payment  policies  in  re- 
lation to,  83-85 
made  possible  by  life  insurance, 

21-22 
relation  of,  to  life  insurance, 

18-19 
period  of,  hedged  through  life 

insurance,  94-97 
Saving  from  mortality,  246-247 
Select  and   ultimate  plans,   222, 

225-226 

Select  mortality  table,  136 
Semi-endowments,  52  • 
Sinking    funds    for    institutions 
accumulated   through    life 
insurance,  39-40 
Single  premium,  definition  of,  48 

nature  of,  143 
Standard  of  solvency,  359 
State    regulation,    in    regard   to, 

agents,  363 
beneficiary,  396 

duties  and  powers  of  supervis- 
ing officials,  356-357 
investments,  344-346,  363 
officials  intrusted  with   super- 
visory control,  356-357 
organization  and  admission  of 

companies,  359-360 
publicity,  360 
reasons  for,  355 
shortcomings    in    practice    of, 

363-364 

subject     matter     covered     by, 
standard  of  solvency,  359 


INDEX 


481 


State  regulation  —  Cont'd. 
taxes  and  fees,  362-363 
treatment      of      policyholders, 

360-362 

versus  federal,  356,  364 
Step-rate  plan  of  paying  premi- 
ums, 49-50,  268-269 
Stock    companies,    arguments   in 
favor     of     stock     control, 
317-318,  320-321 
control  of,  compared  with  that 
of  mutual  companies,  317- 
318 

loading  of  premiums,  in  rela- 
tion to,  314-317 
nature  of,  313 

Stock  investments,  345,  351-352 
Suicide  clause,  381-382 
Surplus,  definition  of,  245 

disability  clause  provisions  in 

relation  to,  302 

dividends,  meaning  of,  251-252 
divisible,  meaning  of,  251-252 
gain  from  forfeitures,  248-249 
gain  from  investment  earnings, 

246 
methods  of  apportioning,  249- 

251 
methods  of  distributing,   252- 

255 

saving  from  loading,  247-248 
saving  from  mortality,  246-247 
sources  of,  245-249 
ways  of  using  dividends,  25g- 

256 

Surrender  charge,  gains  from  for- 
feitures, 248-249 
meaning  of,  230 
reasons  justifying,  234-237 
Surrender    values,    liberality    of 
companies    in    matter    of, 
233-234 

meaning  of,  229-230 
non-forfeiture   laws  and,   231- 

233 

options   granted,    237-238 
Surrenders,  extent  of,  230 
Survivorship     annuity     policies, 
101-102 

Taxation    of    life    insurance,    26, 
362-363 


Term  policies,  advantages  of,  63- 
67 

advantages  of  the  conversion 
privilege  in,  70 

as  a  means  of  protecting  busi- 
ness risks,  33 

classification  of,  47 

convertible  feature  of,  69-70 

definition  of,  62 

disability  insurance  in  relation 
to,  292-293 

disadvantages  of,  67-68 

endowment  policies  contain  a 
term  insurance  feature, 
88-89 

nature  of,  62-63 

net  annual  level  premium  on, 
computation  of,  178-179 

net  single  premium  on,  compu- 
tations of,  149-154 

premiums  on,  compared  with 
those  charged  on  other 
types  of  policies,  64 

renewable  and  non-renewable, 
69 

restrictions  in  issuing,  62,  69 

types  of,  62 

uses  of,  62,  63-67 
Termination  of  policies  analyzed, 

230-231 

Thrift  encouraged  by  life  insur- 
ance, 20-22 
Tontine  plan,  52,  253 
Transmissibility    of    beneficiary's 
interest,  404-406 

Ultimate  mortality  table,  136, 
225 

Unearned  premium.  See  •  Re- 
serve 

Warranties,  classification  of, 
377-378 

definition  of,  376 

importance  of,  376 

incontestable  clause  in  rela- 
tion to,  379-381 

purpose  of,  376-377 

state  statutes  relating  to,  378- 

379 

Wells,  Daniel  H.,  citation  from, 
relative  to  apportionment 
of  surplus,  251 


482 


INDEX 


Whole-life  policies,  cash  and  loan 
values,  75-76,  77 

continuous  premium  payments, 
disadvantage  of,  76-77 

definition  of,  72 

guaranteed  values  in,  75-76 

net  annual  level  premium  com- 
putation in,  179-182 

net  single  premium  computa- 
tions in,  154-157 

permanent  protection  furnished 
by,  72-73 

premiums  in,  compared  with 
those  charged  on  other 
types  of  policies,  73 

saving  combined  with  insur- 
ance, 74-76 

at  smallest  initial  outlay,  73- 
74 

specimen  copy  of,  438 


Willett,  Allen  TL,  citation  from, 
relative  to  saving  result- 
ing from  combination  of 
risks,  11 

Woods,  Edward  A.,  citations 
from,  relative  to,  gene- 
ral agency  system,  337- 
338 

necessity  of  having  agents,  333 
specialization  in  large  agencies, 

338 

use  of  life  insurance  for  busi- 
ness  purposes,   33-34 

Woman's  rights  in  relation  to 
life  insurance,  16 


Zartman,  Lester  M.,  citation 
from,  relative  to  life-in- 
surance taxation,  366 


(7) 


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